Companies Bill 013

Understanding
Companies Bill 2013

Analysis of Accounting, Auditing and
Corporate Governance changes
Foreword
Dear reader,
I am pleased to share with you our publication
Understanding Companies Bill 2013 Analysis of
Accounting, Auditing and Corporate Governance
changes.
1he Bill Lakes a siqnilcanL sLep in sLrenqLheninq
Corporate Governance with introduction of
key provisions around duties and liabilities of
Directors / Independent directors, Auditor rotation,
esLablishmenL ol Serious Fraud lnvesLiqaLion Ollce
(SFIO), constitution of National Financial Reporting
Authority (NFRA), Class action suit, Corporate
Social Responsibility (CSR) etc.
We are hopeful that the Companies Bill 2013
will soon become an Act once it is passed in the
Ra|ya Sabha and iL receives Lhe lnal assenL lrom
the President of India. The new enactment is a
milestone event for the Indian corporates with
far-reaching consequences.
The full impact of the Companies Bill is not yet
clear, as many matters will be covered by rules
or circulars, which will be issued later. Some
examples are a full list of relatives covered
under various sections, class I, II, III companies
with respect to applicability of useful lives for
depreciation, various matters relating to eligibility
of auditors such as amount of indebtedness or
nature of business relationships that is permitted,
clarity on jurisdiction and constitutionality of
proceedings (in the matters of professional and
other misconduct by the members of ICAI) by
NFRA under the companies bill and disciplinary
board/committee under the CA act, mandatory
appointment of internal auditor for such class or
classes of companies as may be prescribed etc.
The impact of the new pronouncement should
not be underestimated and companies and other
stakeholders should start examining its impact and
swift action.
We are getting close to 1 million registered
companies in India. A strong company legislation
is Lherelore imperaLive. However, Lhe ellcacy ol
the new enactment will depend on how well it is
implemented.
The Ministry of Corporate Affairs (MCA) will play
a major role to ensure that there is clarity and
consistency in understanding the new legislation.
The MCA will have to proactively issue circulars and
clarilcaLions so LhaL consLiLuenLs do noL have any
dillculLy in implemenLaLion and Lhe chanqes are
implemented in the right spirit.
While there are several amendments in the new
bill, we have categorized the key changes into
lve imporLanL areas lor ease ol your readinq (a)
accounts, (b) audit, (c ) corporate governance, (d)
related party transactions, (e) loans, investments
and mergers and amalgamations.
l hope LhaL you will lnd Lhis publicaLion uselul in
understanding some key provisions of the new
legislation. We welcome your feedback on this
publication.
Yours sincerely,
Neville Dumausia
Partner and National Leader
1 Understanding Companies Bill 2013
I Accounting __________________________________ 03
Financial year ...............................................................................03
National Financial Reporting Authority ..........................................05
Financial statements .....................................................................06
Financial statements authentication & boards report .....................07
RiqhLs ol member Lo copies ol audiLed lnancial sLaLemenLs ............08
Re-opening/revision of accounts ...................................................09
PreparaLion ol consolidaLed lnancial sLaLemenLs ...........................10
Control vs. subsidiary ...................................................................11
DelniLion ol Lhe Lerm associaLe .....................................................13
Depreciation ................................................................................13
Utilization of securities premium ...................................................16
Declaration and payment of dividend .............................................17
Issue of bonus shares ...................................................................18
Registered valuers ........................................................................18
II Audit and Auditors ___________________________ 19
Appointment of auditors ...............................................................19
Rotation of auditors ......................................................................20
Independence/prohibited services .................................................22
LliqibiliLy, qualilcaLion & disqualilcaLions ......................................23
Removal/resignation of the auditor ...............................................25
Reporting responsibilities ..............................................................25
Penalties on auditor ......................................................................27
Cost accounting and audit .............................................................28
Contents
2 Analysis of Accounting, Auditing and Corporate Governance changes
III Corporate Governance _______________________ 29
Corporate social responsibility ......................................................29
Serious Fraud lnvesLiqaLion Ollce .................................................31
Class Action .................................................................................31
Directors ......................................................................................34
Independent directors...................................................................34
Code of conduct for independent directors ....................................35
Liabilities of independent director .................................................36
Audit committee ...........................................................................36
Other committees ........................................................................37
Internal audit ...............................................................................38
V Mergers, amalgamation and reconstruction _____ 47
Mergers, amalgamation and reconstruction ...................................47
IV Related party transactions, loans and investments ___ 39
DelniLion ol relaLive .............................................................................. 39
DelniLion ol relaLed parLy ...................................................................... 40
Related party transactions ..................................................................... 41
Restriction on non-cash transactions involving directors ......................... 42
Loans to directors and subsidiaries ......................................................... 43
Loans and investments by company ....................................................... 43
Disclosure of interest by directors .......................................................... 45
Contents
VI Glossary __________________________________________________________50
Overview and key changes
1. 1he exisLinq Companies AcL delnes Lhe Lerm "lnancial
year" as "Lhe period in respecL ol which any prolL and
loss account of the body corporate laid before it in AGM
is made up, whether that period is a year or not. The
Companies AcL also provides LhaL Lhe lnancial year ol a
company will normally not exceed 15 months. However, a
company can extend it to 18 months, after getting special
permission from the registrar.
Accordinq Lo Lhe Companies Bill, Lhe lnancial year ol a
company will be the period ending on 31 March every year.
2. Under the Companies Bill, a company, which is a holding
or subsidiary of a company incorporated outside India
and is required Lo lollow a dillerenL lnancial year lor
consolidaLion ol iLs lnancial sLaLemenL ouLside lndia, may
apply Lo Lhe Lribunal lor adopLion ol a dillerenL lnancial
year. ll Lhe Lribunal is saLisled, iL may allow Lhe company
Lo lollow a dillerenL period as iLs lnancial year.
3. All exisLinq companies will need Lo aliqn Lheir lnancial
year with the new requirement within two years from the
commencement of the new law.
Financial year
Accounting
Key impact
1. All companies, except companies, which are holding/
subsidiary of foreign company and exempted by the
tribunal, will need to follow 1 April to 31 March as their
lnancial year. ConsequenLly, Lhey will noL be allowed
to have a period longer or smaller than 12 months as
lnancial year. 1houqh Lhe Lribunal can provide exempLion
for some companies from following a uniform accounting
year, listed companies in particular for purposes of better
peer comparison can still choose to follow a uniform year
and not seek exemption.
2. The Income-tax Act requires all companies to follow 1
April to 31 March as their previous year, for tax reporting
purposes. The requirement of the Companies Bill is
consistent with the Income-tax Act and will eliminate the
requiremenL Lo prepare separaLe Lax lnancial sLaLemenLs.
3. Companies in industries with cyclical/seasonal businesses,
e.q., suqar indusLry, will noL be able Lo relecL Lhe resulLs ol
one producLion cycle in a sinqle seL ol lnancial sLaLemenLs.
4. Though majority companies already follow 1 April to 31
March as Lheir lnancial year, adopLion ol unilorm lnancial
year for all companies may create practical challenges
for directors (including independent directors), audit
committee members and auditors. For example, a listed
company is required to submit its audited annual results
to the stock exchange within two months from the end of
each lnancial year. Hence, mosL ol Lhe acLiviLies will be
concentrated in these two months.
Potential issues
1. A company, which is a holding/subsidiary of a foreign
company requiring consolidation outside India, will have
an opLion Lo lollow a dillerenL period as "lnancial year."
However, this option is not automatic. Rather, it will need
Lo seek specilc approval lrom Lhe Lribunal. 1his may
create additional administrative hurdles, both for the
company as well as the tribunal. Further, it is also not clear
what guidelines the tribunal will consider to grant
the exemption.
2. A company with a foreign subsidiary will be allowed to
adopL a dillerenL lnancial year only il iL is required Lo
lollow a dillerenL lnancial year lor preparaLion ol CFS
outside India. In case of a foreign subsidiary, CFS will
generally be prepared for India purposes. Hence, an Indian
company with a foreign subsidiary may not be able to
adopL a dillerenL lnancial year. However, il Lhe loreiqn
subsidiary is also a holding company and has to prepare
a CFS lor a dillerenL lnancial year, Lhen Lhe Lribunal may
consider exempting the ultimate parent in India from
adopLinq a unilorm lnancial year.
3. It appears that the tribunal will grant exemption to follow
dillerenL lnancial year Lo a company only il iL is a holdinq
or subsidiary of a company incorporated outside India
and is required Lo lollow a dillerenL lnancial year lor
preparation of CFS outside India. However, a company,
which is an associate/ joint venture of the company
incorporated outside India or has an associate/ joint
venture outside India, will not be eligible for similar
exemption. This is despite the fact that associates and joint
ventures are also required to be included in CFS.
4. In accordance with AS 21, AS 23 and AS 27, a parent
company can use lnancial sLaLemenLs ol subsidiaries,
associates and joint ventures up to a different reporting
date to prepare CFS if it is impractical to have their
lnancial sLaLemenLs prepared up Lo Lhe same reporLinq
date. This requirement is contained in the Companies
Accounting Standard Rules. This is a subordinate
legislation and cannot override the requirements of
the Companies Bill. Hence, the relief contained in these
three standards becomes irrelevant with respect to the
subsidiaries, associates and joint ventures, which are
established as companies in India, except in some cases as
explained in the example below:
Parent company P has subsidiary S and associate A, all
companies incorporated in India. In this scenario, one will
Lypically expecL all companies Lo lollow unilorm lnancial
year, namely, 1 April Lo 31 March, and Lhe lnancial
statements for the same period will be used to prepare
CFS. However, it may so happen that associate A is a
subsidiary of the foreign parent FP. Hence, A can apply
Lo Lhe Lribunal lor lollowinq dillerenL lnancialyear. ll Lhe
tribunal grants such permission to A, Parent company P
may have Lo use Lhe lnancial sLaLemenLs ol A drawn upLo
a different reporting date for the application of the equity
method.
1. Under the existing Companies Act, the Central
Government has constituted an advisory committee known
as the National Advisory Committee on Accounting
Standards (NACAS) to advise the Central Government
on the formulation and laying down of accounting policies
and accounting standards for adoption by companies. The
NACAS may also advise the Central Government on other
accounting/auditing related matters referred to it. Under
the Companies Bill, NACAS will be replaced by the NFRA.
The NFRA will:
(a) Make recommendations to the Central Government
on the formulation and laying down of accounting
and auditing policies and standards for adoption by
companies or class of companies and their auditors
(b) Monitor and enforce the compliance with accounting
standards and auditing standards
(c) Oversee the quality of service of the professions
associated with ensuring compliance with such
standards, and suggest measures required for
improvement in quality of service, and
(d) Perform such other functions relating to clauses (a),
(b) and (c) as may be prescribed.
2. The NFRA will:
(a) Have the power to investigate, either suo moto or on
a reference made to it by the Central Government,
for such class of bodies corporate or persons,
the matters of professional or other misconduct
commiLLed by any member or lrm ol charLered
accountants, registered under the CA Act. No
other institute or body will initiate or continue any
proceedings in such matters of misconduct where the
NFRA has initiated an investigation.
(b) Have the same powers as are vested in a civil court
under the Code of Civil Procedure, 1908, while trying
a suit, in respect of the following matters:
(i) Discovery and production of books of
account and other documents, at such place
and aL such Lime as may be speciled by
the NFRA
(ii) Summoning and enforcing the attendance of
persons and examining them on oath
(iii) Inspection of any books, registers and other
documents
(iv) Issuing commissions for examination of
witnesses or documents.
(c) Have power to impose strict penalties if professional
or other misconduct is proved.
3. After examining the recommendation of the NFRA,
the Central Government may prescribe standards of
accounting and/or standards on auditing or any addendum
thereto, as recommended by the ICAI. Till the time, any
audiLinq sLandards are noLiled, sLandards ol audiLinq
speciled by Lhe lCAl will be deemed Lo be Lhe audiLinq
standards.
Key impact
NFRA will act as regulator for members registered under the CA
Act working in companies as well as auditors. Hence, it may also
Lake acLion aqainsL Lhe company ollcials il Lhey are charLered
accountant and fail to perform their duties.
While the Bill states that till the time, any auditing standards
are noLiled, sLandards ol audiLinq speciled by Lhe lCAl will be
deemed to be the auditing standards. However, similar provision
does not exist for the accounting standards. In other words, for
accounting standards to become mandatory they have to be
issued by the NFRA.
Potential issue
The Companies Bill requires that no other institute or body
will initiate or continue any proceedings in such matters of
misconduct where the NFRA has initiated an investigation. The
CA Act also requires the Disciplinary Board/ Committee to deal
with the matters of professional and other misconduct by the
members of the ICAI. This may create constitutionality and
jurisdiction issue which needs to be addressed.
The outcome of investigation by NFRA under the Bill vis--vis
disciplinary proceedings under the CA Act can be different.
Under the CA Act, all misconducts by the members are
categorized into the First and the Second Schedule. Depending
on Lhe naLure ol misconducL, maximum lne can be eiLher `1
lakh or `5 lakh. Similarly, the maximum period for which a
members name can removed from the register of member
can be either 3 months or life time. In contrast, under the
Companies Bill, minimum penalLy lor an audiL lrm is `10 lakh,
but this may extend to ten times of the fees received. Also, the
NFRA can debar either the concerned member or the entire
lrm lrom pracLicinq as a member ol Lhe lCAl lor a minimum
period of six months. However, the NFRA may extend this
period upto 10 years.
National Financial
Reporting Authority
CurrenLly, neiLher Lhe Companies AcL nor any noLiled
AS delnes Lhe Lerm "lnancial sLaLemenLs." However, Lhe
Companies Act requires all companies to prepare the balance
sheeL and Lhe prolL and loss accounL, Lo place Lhe same belore
Lhe ACM. ln addiLion, noLiled AS 3 requires companies, which
are noL SMCs, Lo prepare cash low sLaLemenL.
1he Companies Bill delnes Lhe Lerm "lnancial sLaLemenLs" Lo
include:
(i) Balance sheeL as aL Lhe end ol Lhe lnancial year,
(ii) ProlL and loss accounL lor Lhe lnancial year,
(iii) Cash low sLaLemenL lor Lhe lnancial year,
(iv) Statement of change in equity, if applicable, and
(v) Any explanatory note forming part of the above
statements.
For one person company, small company and dormant
company, lnancial sLaLemenLs may noL include Lhe cash low
statement.
Like the Companies Act, the Companies Bill also contains
a lormaL lor preparaLion and presenLaLion ol lnancial
statements. Except for addition of general instructions for
preparaLion ol CFS, Lhe lormaL ol lnancial sLaLemenLs qiven
in the Companies Bill is the same as the revised Schedule VI
noLiled under Lhe exisLinq Companies AcL.
Key impact
1. 1he exempLion lrom preparaLion ol cash low sLaLemenL
given under the Companies Bill is different from that under
noLiled AS. Civen below is Lhe comparison:

Relevant
factor
Nctihed AS Companies Bill
One person
company
Not a criterion for
idenLilcaLion as SMC.
Exempted from
preparinq cash low
statement.
Dormant
company
Not a criterion for
idenLilcaLion as SMC.
Exempted from
preparinq cash low
statement.
SMC vs. small company
Turnover Does not exceed `50
crore
Does not exceed `2
crore unless higher
amount is prescribed
Relevant
factor
Nctihed AS Companies Bill
Paid-up share
capital
No such criterion Does not exceed `50
lakh unless higher
amount is prescribed
Listing Equity or debt
securities are neither
listed nor are in the
process of listing.
Should not be public
company.
Special
category
Company is not
a bank, lnancial
institution or entity
carrying on insurance
business.
Company is not
governed by any
special Act.
Company is not
formulated for
charitable purposes.
Borrowings
(including
public deposits)
Does not exceed
`10 crore
No such criterion
Holding/
subsidiary
Company is not a
holding/ subsidiary of
non-SMC.
Company should
not be holding/
subsidiary company.

The Companies Bill requires more companies, e.g.,
companies with turnover between `2 crore to `50 crore, to
prepare cash low sLaLemenL.
2. Till the time applicability of AS 3 is amended, companies,
which are currenLly required Lo prepare cash low
statement, will continue to do so, even if they do not
meet the Companies Bill criteria for the preparation of
cash low sLaLemenL. For example, a one person company
with a turnover greater than `50 crore though not
required Lo prepare cash low sLaLemenL under Lhe Bill,
will noneLheless have Lo prepare cash low sLaLemenL
as required by noLiled sLandards. 1houqh Lhe noLiled
standard is a subordinate legislation, in our view, the
stricter of the two requirements will apply.
3. Since the Companies Bill does not lay down any format for
preparaLion ol cash low sLaLemenL, companies will need Lo
follow AS 3 in this regard. In respect of listed companies,
the listing agreement requires the indirect method for
preparinq cash low sLaLemenLs. 1hus, under Lhe Bill, non
listed companies will have a choice of either applying the
direct or indirect method under AS 3 to prepare the cash
low sLaLemenL. Due Lo Lhe lisLinq aqreemenL requiremenL,
that choice will not be available to listed companies.
4. The addition of words if applicable with SOCIE
requirement suggests that the same will apply only under
Ind-AS.
Financial statements
1. Both the Companies Act and the Companies Bill require
lnancial sLaLemenLs Lo be approved by Lhe board. 1he
existing Companies Act states that the Banking Companies
AcL will qovern siqninq requiremenLs lor lnancial
statements of banking companies. For other companies,
lnancial sLaLemenLs need Lo be siqned by manaqer/
secretary (if any) and at least two directors one of whom
will be a managing director. The Companies Bill requires
both SFS and CFS of all companies (including banking
companies) to be signed atleast by the Chairperson of
the company if he is authorized by the board, or by two
directors out of which one will be managing director
and Lhe Chiel LxecuLive Ollcer, il he is a direcLor in Lhe
company, Lhe Chiel Financial Ollcer, and Lhe Company
Secretary, if appointed
2. The Companies Bill will require the inclusion of the
following additional information in the boards report,
which is not required under the existing Companies Act.
(a) Extract of the annual return, which covers matters
such as indebtedness, shareholding pattern, details
of promoters, directors and KMP and changes
therein, details of board meetings and attendance,
remuneration of directors and KMPs and penalty or
punishment imposed on the company, its directors/
ollcers
(b) Statement on independence declaration given by
independent directors
(c) If a company is required to constitute NRC,
companys policy on directors appointment and
remuneration including criteria for determining
qualilcaLions, posiLive aLLribuLes, independence ol a
director and remuneration policy for KMP and others
(d) Explanations or comments by the board on every
qualilcaLion, reservaLion or adverse remark or
disclaimer made by the auditor and by the company
secretary in their reports
(e) Particulars of loans, guarantees or investments (refer
section titled Related party transactions)
(f) Particulars of contracts/arrangements with related
parties
(g) A statement indicating development and
implementation of risk management policy, including
risk which may threaten the existence of the
company
(h) Details of policy developed and implemented on CSR
(i) For all listed companies, and every other public
company with paid-up share capital as may be
prescribed, a statement indicating the manner in
which formal annual evaluation has been made by
the board of its own performance and that of its
committees and individual directors.
3. Directors Responsibility Statement will include the
following additional information, which is not required
under the existing Companies Act.
(a) For listed companies, directors had laid down internal
lnancial conLrols and such conLrols are adequaLe and
were operating effectively
(b) Directors had devised proper systems to ensure
compliance with the provisions of all applicable laws
and that such systems were adequate and operating
effectively.
4. If a company contravenes these requirements, it will be
punishable wiLh a lne, which will noL be less Lhan `50
thousand and can extend up to `25 lakh. Lvery ollcer
of the company who is in default will be punishable with
imprisonment for a term, which may extend to three years
or wiLh lne which will noL be less Lhan `50 thousand but
which may extend to `5 lakh, or with both.
Financial statements
authentication and
boards report
Key impact
1. Since the Companies Bill no longer exempts banking
companies from signing requirements, they will likely
need to comply with the requirements of the Bill as well as
the Banking Companies Act. The Banking Companies Act
requires LhaL in Lhe case ol a bankinq company, lnancial
sLaLemenLs will be siqned by iLs manaqer/principal ollcer
and at least three directors if there are more than three
directors. If the banking company does not have more
Lhan Lhree direcLors, all direcLors need Lo siqn Lhe lnancial
statements.
2. Currently, the listing agreement requires that a listed
company should lay down procedures to inform board
members about the risk assessment and minimization
procedures. These procedures need to be periodically
reviewed to ensure that executive management controls
risk Lhrouqh means ol a properly delned lramework.
However, there is no such requirement for unlisted
companies. Hence, many unlisted companies may not have
well documented risk management policies. To comply
with disclosure requirements concerning risk management,
companies will need to develop and document properly
their risk management policies. Also, the senior
management may need to review its implementation on
regular basis.
3. By aLLesLinq Lhe lnancial sLaLemenLs, Lhe CFO will be
assuming an onerous responsibility of ensuring that
Lhe lnancial sLaLemenLs are Lrue and lair. Under Lhe
existing listing requirements, which is applicable to
lisLed companies only, CFOs do noL have Lo siqn lnancial
statements, but have to certify to the board that the
lnancial sLaLemenLs are lree ol maLerial missLaLemenLs.
Going forward the CFO, if he is appointed, will have to
aLLesL lnancial sLaLemenLs, and Lhe requiremenL will apply
to both listed and non-listed companies.
Potential issue
Additional disclosures required in the boards report/Director
Responsibility Statement will bring increased transparency
and Lhereby increase sLakeholders' conldence in Lhe company.
However, some of these disclosures may sometimes contain
commercially sensitive information and disclosure of too much
information in the public may put companies in a competitive
disadvantageous situation.
The Companies Bill will introduce the following key changes:
1. Like the existing Companies Act, the Companies Bill also
requires LhaL a copy ol lnancial sLaLemenLs, alonq wiLh
auditors report and every other document required by law
to be laid before the general meeting, will be sent to every
member, trustee for debenture holders and other entitled
persons, not less than 21 days before the date of the
meeting. Considering the requirement to prepare CFS, the
Companies Bill requires CFS also to be circulated.
allows listed companies to circulate a statement containing
the salient features of above documents in the prescribed
form (known as AFS).
3. Under the Companies Bill, the Central Government may
prescribe Lhe manner ol circulaLion ol lnancial sLaLemenLs
for companies with such net worth and turnover as may
be prescribed. Such clause does not exist under the
Companies Act.
4. Currently, the listing agreement requires all listed
companies to maintain a functional website containing
basic inlormaLion abouL Lhe company, includinq lnancial
inlormaLion. However, iL does noL specilcally require
companies Lo place compleLe lnancial sLaLemenLs on Lhe
website. The Companies Bill will require a listed company
Lo place iLs lnancial sLaLemenLs, includinq CFS, il any, and
all other documents required to be attached thereto, on its
website.
5. Every company (including unlisted companies) with one or
more subsidiaries will:
(a) Place separate audited accounts in respect of each of
its subsidiary on its website, if any
(b) Provide a copy ol separaLe audiLed lnancial
statements in respect of each of its subsidiary, to a
shareholder who asks for it
Rights of member
to copies of audited
hnancial statements
Key impact
The Companies Bill does not mandate unlisted companies to
have Lheir websiLe. RaLher, Lhey are required Lo place lnancial
statements of subsidiaries on the website, if they have one. The
Companies Bill, however, does not mandate unlisted companies
to place their own SFS or CFS on the website, even if they have
one. Many companies may choose to do so on their own.
Potential issue
The Companies Bill allows listed companies to circulate a
statement containing salient features of all the documents,
which are required to be circulated. Since these companies
will also be required to prepare and circulate CFS, it will allow
them to prepare and circulate CFS also in the abridged format.
However, clause 32 of the listing agreement states that
companies will be required to publish full CFS in the annual
report. Hence, the following two views seem possible:
(i) To comply with clause 32, a company will need to
circulate complete CFS with AFS prepared for SFS. Thus,
an abridged version of CFS is not permitted.
(ii) Clause 32 requires CFS to be published in the annual
report. However, it does not state that complete CFS
should be circulated to all shareholders.
We suggest that the SEBI may clarify this issue.
1. Currently, the MCA circular allows a company to reopen
and revise its accounts after their adoption in the AGM
and llinq wiLh Lhe reqisLrar Lo comply wiLh Lechnical
requirements of any other law to achieve the objective
of exhibiting a true and fair view. The revised annual
accounts are required to be adopted either in the EGM or
in Lhe subsequenL ACM and lled wiLh Lhe reqisLrar. 1he
Companies Bill contains separate provisions relating to:
(a) Re-opening of accounts on the court/tribunals order
(b) VolunLary revision ol lnancial sLaLemenLs or board's
report
Re-opening of accounts on the court/tribunals order
2. On an application made by the Central Government, the
Income-tax authorities, the SEBI, any other statutory/
regulatory body or any person concerned, the tribunal/
court may pass an order to the effect that:
(i) The relevant earlier accounts were prepared in a
fraudulent manner, or
(ii) The affairs of the company were mismanaged during
the relevant period, casting a doubt on the reliability
ol lnancial sLaLemenLs.
3. If the tribunal/court issues the above order, a company
will need to re-open its books of account and recast its
lnancial sLaLemenLs.
Voluntary revision of hnancial statements or board's report
4. ll iL appears Lo direcLors LhaL lnancial sLaLemenLs/
boards report do not comply with the relevant Companies
Bill requiremenLs, Lhe company may revise lnancial
statements/board report in respect of any of the three
precedinq lnancial years. For revision, a company will
need to obtain prior approval of the tribunal.
5. The Tribunal, before passing the order for revision, will
give notice to the Central Government and the Income-tax
authorities and consider their representations, if any.
6. DeLailed reasons lor revision ol such lnancial sLaLemenL/
boards report will be disclosed in the boards report for
Lhe relevanL lnancial year in which such revision is beinq
made.
Re-opening/revision
of accounts
7. ll copies ol lnancial sLaLemenLs/reporL have been senL
to members, delivered to the registrar or laid before
the general meeting, revisions must be restricted to
corrections arising from non-compliances stated at 4
above and consequential changes.
8. A company will noL revise iLs lnancial sLaLemenLs/ board's
report more than once in a year.
9. The Central Government may make further rules as to the
application of these requirements.
Key impact
1. While the Companies Bill sets out a three-year time limit for
volunLary revision ol lnancial sLaLemenLs/board reporL,
no such time limit has been prescribed for re-opening of
accounts due to the court/tribunals order.
2. Revision/reopeninq ol lnancial sLaLemenLs lor a period
earlier Lhan immediaLely precedinq lnancial year may
impacL lnancial sLaLemenLs lor subsequenL years also.
3. Recently, the SEBI has issued a Circular, which empowers
iL Lo require revision ol lnancial sLaLemenLs, il Lhe audiL
reporL is qualiled. One may arque LhaL Lhe provisions
of the Companies Bill concerning revisions/ reopening
of accounts are broader in the concept. Hence, they are
expected to help in addressing legal issues that were
expected to arise due to the implementation of the SEBI
Circular.
Potential issues
1. In case of voluntary change in accounting policy, error
and reclassilcaLion, lndAS requires LhaL Lhe comparaLive
amounL appearinq in Lhe currenL period lnancial
statements should be restated. To help companies in
complying with this requirement once Ind-AS become
applicable, the MCA may clarify as to how Ind-AS
requirement will work vis--vis the Companies Bill provision
concerninq reopeninq/revision ol previous year lnancial
statements.
2. Many merger, amalgamation and reconstruction schemes
approved by the court contain an appointed date which is
earlier Lhan Lhe beqinninq ol Lhe currenL lnancial year. lL
seems likely that in these cases, a company may be able
Lo volunLarily revise iLs lnancial sLaLemenLs lor earlier
periods after taking prior approval of the tribunal, to give
effect to the court scheme from the appointed date.
1. Currently, only clause 32 of the listing agreement mandates
listed companies to publish CFS. Neither the existing
Companies Act nor AS 21 requires other companies to
prepare CFS. Under the Companies Bill, a company with one
or more subsidiaries will, in addition to SFS, prepare CFS.
2. CFS will be prepared in the same form and manner as SFS of
the parent entity.
3. The requirements concerning preparation, adoption and
audit will, mutatis mutandis, apply to CFS.
4. For this requirement, the word subsidiary includes
associate company and joint venture.
5. Schedule III of the Companies Bill, which lays down the
lormaL lor preparaLion ol lnancial sLaLemenLs, conLains Lhe
following general instructions for preparation of CFS:
(i) Where a company is required to prepare CFS, the
company will mutatis mutandis follow the requirements
of this Schedule.
(ii) ProlL or loss aLLribuLable Lo "minoriLy inLeresL" and
Lo owners ol Lhe parenL in Lhe sLaLemenL ol prolL and
loss will be presented as allocation for the period.
Minority interests in the balance sheet will be
presented within equity separately from the equity of
the owners of the parent.
(iii) A statement containing information such as share in
prolL/loss and neL asseLs ol each subsidiary, associaLe
and joint ventures will be presented as additional
information. Currently, the MCA circular requires
information, such as, capital, reserves, total assets
and liabilities, details of investment, turnover and
prolL belore and alLer LaxaLion, Lo be disclosed lor
subsidiaries only.
(iv) A company will disclose the list of subsidiaries
or associates or joint ventures, which have not
been consolidated along with the reasons for non
consolidation.
Key impact
1. All companies, including unlisted and private companies, with
subsidiaries will need to prepare CFS. They need to gear up
Lheir lnancial reporLinq process lor Lhe same.
2. For all companies, CFS should comply wiLh noLiled AS. 1his
will impact companies that are currently preparing CFS
only according to IFRS, based on option given in the listing
agreement. Those companies will have to mandatorily
prepare Indian GAAP CFS, and choose to retain preparing
IFRS CFS on a voluntary basis or stop preparing the same.
Preparation of
consolidated hnancial
statements
3. A company may need to give all disclosures required by
Schedule III to the Companies Bill, including statutory
information, in the CFS. It may be argued that AS 21
(explanation to paragraph 6) had given exemption from
disclosure of statutory information because the existing
Companies Act did not mandate preparation of CFS. With
the enactment of the Companies Bill, this position is likely
to change. Also, the exemption in AS 21 may not override
Schedule III because there is no prohibition on disclosure
of additional information and the two requirements can
co-exist.
The collection of statutory information for foreign
subsidiaries is likely to be challenging and companies need
to gear-up their system for the same.
4. ResLricLions reqardinq reopeninq/revision ol lnancial
statements, after adoption at AGM, will apply to CFS also.
5. Unlike IAS 27, the Companies Bill does not exempt
an intermediate unlisted parent from preparing CFS.
Preparation of CFS at each intermediate parent level is
likely to increase compliance cost. In our view, this may be
one area where the MCA may consider providing relaxation
to the intermediate parent at a future date.
Potential issue
The explanation, which states that the word subsidiary
includes associate company and joint venture, is not clear.
Apparently, the following two arguments seem possible:
(i) A company needs to consolidate associates and joint
venLures in accordance wiLh Lhe noLiled sLandards. ln
other words, CFS is prepared only when the group has at
least one subsidiary. When CFS is prepared, associates
and joint ventures are accounted for using equity/
proportionate consolidation method.
(ii) A company needs to apply equity method/proportionate
consolidation to its associates and joint ventures even if
it does not have any subsidiary. In other words, CFS will
be prepared when the company has an associate or joint
venture, even though it does not have any subsidiary. The
associate and joint venture will be accounted using the
equity/proportionate consolidation method in the CFS.
1he lrsL view seems more aliqned Lo Lhe requiremenLs ol
noLiled AS. 1he second view can be supporLed il Lhe inLenLion
of the law maker was to require a company to apply equity
method/ proportionate consolidation method to its associates
and joint ventures even if it does not have any subsidiary. In
our view, it may be appropriate for the ICAI and MCA to provide
clarilcaLion on Lhis issue.
1. 1he exisLinq Companies AcL does noL delne Lhe Lerm
control. It explains the meaning of terms holding
company and subsidiary as below:
A company will be deemed to be a subsidiary of another
company if, but only if:
(a) The other company controls the composition of its
board of directors, or
(b) The other company:
(i) Where Lhe lrsLmenLioned company is
an existing company in respect of which
the holders of preference shares issued
before the commencement of this Act have
the same voting rights in all respects as
the holders of equity shares, exercises or
controls more than half of the total voting
power of such company,
(ii) Where Lhe lrsLmenLioned company is any
other company, holds more than half in
nominal value of its equity share capital, or
(c) 1he lrsLmenLioned company is a subsidiary ol any
company, which is the others subsidiary.
2. NoLiled AS 21 delnes Lhe Lerms "conLrol" and
subsidiary as below:

Control:
(a) The ownership, directly or indirectly through
subsidiary(ies), of more than one-half of the voting
power of an enterprise, or
(b) Control of the composition of the board of directors
in the case of a company or of the composition of the
corresponding governing body in case of any other
enLerprise so as Lo obLain economic benelLs lrom iLs
activities.
A subsidiary is an enterprise that is controlled by another
enterprise (known as the parent).
Control vs. subsidiary
3. 1he Companies Bill delnes Lhe Lerms "subsidiary" and
control as below:
Subsidiary company or subsidiary, in relation to any
other company (that is to say the holding company), means
a company in which the holding company:
(i) Controls the composition of the board of directors, or
(ii) Exercises or controls more than one-half of the total
share capital either at its own or together with one or
more of its subsidiary companies.
Control shall include the right to appoint majority of the
directors or to control the management or policy decisions
exercisable by a person or persons acting individually or
in concert, directly or indirectly, including by virtue of
their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner.
Key impact
1here are dillerences beLween Lhe delniLions ol Lhe "conLrol"
and subsidiary given in the existing Companies Act, AS
21 and the Companies Bill. The likely impact or otherwise of
differences will depend on resolution of potential issues.
Potential issues
1. ApparenLly, Lhe delniLion ol Lerm "conLrol" qiven in Lhe
Companies Bill is broader than the notion of control
envisaqed in Lhe delniLion ol Lhe Lerm "subsidiary." ln
accordance wiLh delniLion ol "subsidiary," only board
control and control over share capital is considered.
However, Lhe delniLion ol Lhe "conLrol" suqqesLs LhaL
a company may control other company through other
mechanism also, say, management rights or voting
agreements. This will raise an issue whether a company
should consider delniLion ol "conLrol" in idenLilyinq
subsidiaries for consolidation and other purposes.
1he delniLion ol Lhe Lerm "conLrol" used in Lhe Companies
Bill appears Lo be based on Lhe delniLion qiven in Lhe SLBl
1akeover Code. lL also appears LhaL Lhe MCA has delned
this term to avoid a scenario where a company controls
the other company through indirect/ proxy mechanism to
avoid poLenLial leqal issues. ln addiLion Lo Lhe delniLion
of the term subsidiary, the Bill uses the term control
aL cerLain oLher places also, e.q., delniLion ol Lhe Lerms
manager and promoter, clause 144 dealing with
Auditor not to render certain services clause 216 dealing
with Investigation of ownership of the company and
clause 241 dealing with Application to Tribunal for relief
in cases ol oppression." lL may be arqued LhaL delniLion ol
the term control is relevant for these purposes. The term
"subsidiary" should be inLerpreLed as delned in Lhe Bill,
wiLhouL consideraLion ol how conLrol is delned.
2. 1he delniLion ol "subsidiary" relers Lo conLrol over more
than one-half of total share capital, without differentiating
between voting and non-voting shares. Hence, an issue
is likely to arise where a company has issued shares with
differential voting rights. To illustrate, let us assume that A
Limited has the following share ownership in B Limited:
Particulars Equity shares
(voting rights)
Preference
shares (non-
voting)
Total
Total share
capital of B
Limited (nos.)
1,000,000 600,000 1,600,000
Shares owned
by A Limited
550,000 100,000 650,000
% ownership
and control
55% 16.67% 40.625%

A Limited controls 55% equity share capital of B Limited,
i.e., shares with voting rights. However, on inclusion of
non-voting preference shares, this holding comes down
to 40.625%. In this case, B Limited is a subsidiary of A
Limited for the purposes of consolidation in accordance
wiLh AS 21. However, based on delniLion ol "subsidiary,"
one can argue that A Limited does not control one-half
share capital of B as required by the Bill.
1he MCA may clarily LhaL delniLions in Lhe Bill are relevanL lor
legal/regulatory purposes. For accounting purposes including
preparaLion ol CFS, delniLions accordinq Lo Lhe noLiled AS
should be used.
1he exisLinq Companies AcL does noL delne Lhe Lerm
"associaLe" or "associaLe company." NoLiled AS 23 delnes Lhe
term associate as an enterprise in which the investor has
siqnilcanL inluence and which is neiLher a subsidiary nor a |oinL
venture of the investor.
1he Companies Bill delnes Lhe Lerm "associaLe company" as
below:
Associate company, in relation to another company, means a
company in which Lhe oLher company has a siqnilcanL inluence,
but which is not a subsidiary company of the company having
such inluence and includes a |oinL venLure company."
1he explanaLion Lo Lhe delniLion sLaLes LhaL lor Lhe purposes
ol Lhis clause, "siqnilcanL inluence" means conLrol ol aL leasL
20% of total share capital, or of business decisions under an
agreement.
Key impact
1he likely impacL, because ol dillerences in Lhe delniLions, will
depend on resolution of potential issues.
Potential issues
1. In accordance with the explanation in the Bill, the term
"siqnilcanL inluence" means conLrol over 207 ol business
decisions. In our view, control over business decisions is an
indicator of subsidiary, rather than associate. It appears
LhaL Lhe delniLion in Lhe Bill "conLrols 207 ol business
decisions is wrongly described. The right way to describe
iL would have been "has siqnilcanL inluence over all criLical
business decisions" and "siqnilcanL inluence is evidenced
by 20% voting power, representation on the board, or
through other means.
2. ln accordance wiLh noLiled AS 23, Lhere is a rebuLLable
presumption that holding of 20% or more of voting power
ol invesLee consLiLuLes siqnilcanL inluence. However,
in certain circumstances, a company may demonstrate
LhaL 207 share ownership does noL consLiLuLe siqnilcanL
inluence. 1he Companies Bill does noL recoqnize such
possibility.
3. AS 23, Ind-AS and IFRS recognize that even if a company
does noL hold 207 shares in oLher company, siqnilcanL
inluence can be evidenced in oLher ways as well, e.q.,
through representation on board of directors or through
material transactions with investor. This aspect is not
covered in Lhe delniLion in Lhe Bill.
1he MCA may clarily LhaL delniLions in Lhe Bill are relevanL lor
legal/ regulatory purposes. For accounting including preparation
ol CFS, delniLions as per Lhe noLiled AS should be used.
Dehnition oI the
term associate
1. The existing Companies Act requires depreciation to be
provided on each depreciable asset so as to write-off 95%
ol iLs oriqinal cosL over Lhe speciled period. 1he remaininq
5% is treated as residual value. Further, Schedule XIV to
the Companies Act prescribes SLM and WDV rates at which
depreciation on various asset need to be provided. Other
key aspects impacting depreciation under the existing
Companies Act are as below:
(a) In accordance with AS 6, depreciation rates prescribed
under Schedule XIV are minimum. If useful life of an
asset is shorter than that envisaged under Schedule
XIV, depreciation at higher rate needs to be provided.
(b) The MCA has issued a General Circular dated 31 May
2011, which states that for companies engaged in
generation/supply of electricity, rates of depreciation
and meLhodoloqy noLiled under Lhe LlecLriciLy AcL will
prevail over the Schedule XIV to the Companies Act.
(c) The MCA amended Schedule XIV in April 2012. The
amendment prescribes amortization rate and method
for intangible assets (toll roads) created under BOT,
BOOT or any other form of PPP route (collectively,
referred to as BOT assets). In accordance with the
amendment, such intangible assets will be amortized
using amortization rate arrived at by dividing actual
revenue for the year with total estimated revenue.
(d) Schedule XIV provides separate depreciation rates for
double shift and triple shift use of assets.
(e) According to a Circular issued by the MCA, unit of
production (UOP) method is not allowed.
(f) Assets whose actual cost does not exceed `5 thousand
are depreciated @ 100%.
(g) The ICAI Guidance Note on Treatment of Reserve
Created on Revaluation of Fixed Assets clariles
that for statutory purposes, such as, dividends and
managerial remuneration, only depreciation based on
hisLorical cosL ol Lhe lxed asseLs needs Lo be provided
ouL ol currenL prolLs ol Lhe company. Accordinqly,
the Guidance Note allows an amount equivalent to
the additional depreciation on account of the upward
revaluaLion ol lxed asseLs Lo be Lranslerred Lo Lhe
sLaLemenL ol prolL and loss lrom Lhe revaluaLion
reserve.
Depreciation
2. The key requirements of the Companies Bill (particularly,
Schedule II) are listed below:
(a) No separate depreciation rate is prescribed for
intangible assets. Rather, the same will be governed
by noLiled AS.
(b) Depreciation is systematic allocation of the
depreciable amount of an asset over its useful life.
(c) The depreciable amount of an asset is the cost of an
asset or other amount substituted for cost, less its
residual value.
(d) The useful life of an asset is the period over which an
asset is expected to be available for use by an entity,
or the number of production or similar units expected
to be obtained from the asset by the entity.
(e) All companies will be divided into the following three
classes to decide application of depreciation rates:
(i) Class of companies as may be prescribed and
whose lnancial sLaLemenLs comply wiLh Lhe
accounting standards prescribed for such
class of companies.
These companies will typically use useful
lives and residual values prescribed in the
schedule II. However, these companies will be
permitted to adopt a different useful life or
residual value for their assets, provided they
disclose |usLilcaLion lor Lhe same.
(ii) Class of companies or class of assets where
useful lives or residual value are prescribed
by a regulatory authority constituted under
an act of the Parliament or by the Central
Government
These companies will use depreciation rates
or useful lives and residual values prescribed
by the relevant authority for depreciation
purposes.
(iii) Other companies
For these companies, the useful life of an
asset will not be longer than the useful life
and the residual value will not be higher than
that prescribed in the proposed Schedule.
(l) Uselul lile speciled in Lhe Schedule ll Lo Lhe
Companies Bill is for whole of the asset. Where cost
ol a parL ol Lhe asseL is siqnilcanL Lo LoLal cosL ol Lhe
asset and useful life of that part is different from the
useful life of the remaining asset, useful life of that
siqnilcanL parL will be deLermined separaLely.
(g) No separate rates are prescribed for extra shift
depreciation. For the period of time an asset is used
in double shift, depreciation will increase by 50% and
by 100% in case of triple shift working.
(h) 1here is no specilc requiremenL Lo charqe 1007
depreciation on assets whose actual cost does not
exceed `5 thousand.
(i) Uselul lives ol lxed asseLs prescribed under Lhe
Companies Bill are different than those envisaged
under Schedule XIV. For instance, the useful life
of buildings other than factory buildings and
other than RCC frame structure prescribed under
Schedule XIV is approximately 58 years, whereas the
same under the Companies Bill will be 30 years. The
uselul lile lor qeneral lurniLure and lLLinqs will be
reduced from 15 to 10 years. Separate useful lives
have been introduced for many items of plant and
machinery used in specilc indusLries, e.q., uselul
lives have been prescribed for machinery used in the
telecommunications business, manufacture of steel
and non-ferrous metals, which are not currently laid
down in Schedule XIV.
(j) From the date of the Companies Bill coming into
effect, the carrying amount of the asset as on that
date:
(a) Will be depreciated over the remaining useful
life of the asset according to the Bill
(b) After retaining the residual value, will be
recognized in the opening retained earnings
where the remaining useful life is nil.
Key impact
1. The useful life of an asset can be the number of production
or similar units expected to be obtained from the asset.
This indicates that a company may be able to use UOP
method for depreciation, which is currently prohibited for
assets covered under Schedule XIV.
2. Companies, covered under class (i) above, will be able to
use different useful lives or residual values, if they have
|usLilcaLion lor Lhe same. lL appears LhaL Lhis provision
is aimed at ensuring compliance with Ind-AS 16 for such
companies. However, they are likely to be able to start
using this option immediately, and need not wait for Ind-
ASs to become applicable.
Potential issues
1. The recent amendment to the existing Schedule XIV of
the Companies Act regarding depreciation of BOT assets
is not contained in the Companies Bill. Rather, it is stated
that depreciation of all intangible assets will be according
Lo noLiled AS. ln conLexL ol lFRS, Lhe lFRlC and lASB have
already concluded that revenue-based amortization is not
appropriaLe, because iL relecLs a paLLern ol Lhe luLure
economic benelLs beinq qeneraLed lrom Lhe asseL, raLher
than a pattern of consumption of the future economic
benelLs embodied in Lhe asseL. However, no such
clarilcaLion has been provided in Lhe conLexL ol noLiled
AS. Consequently, it seems unclear at this stage whether
infrastructure companies will be entitled to use revenue-
based amortization under AS 26 after the enactment of
the Companies Bill. The ICAI may provide an appropriate
clarilcaLion on Lhis maLLer.
2. The transitional provision requiring remaining carrying
value to be depreciated over remaining useful life can
provide very harsh outcomes. For example, consider
that the remaining carrying value is 60% of the original
cost, whereas the remaining useful life is one year. In this
scenario the entire 60% will be depreciated in one year.
However, if in this example, the remaining useful life was
nil, the entire 60% would be charged to retained earnings.
To illustrate, it may be noted that the Companies Bill has
reduced useful life of the buildings other than factory
buildings and other than RCC frame structure from 58
to 30 years. A company was depreciating such building
in accordance with the useful life envisaged in the
Schedule XIV to the Companies Act. If the company has
already used building for 30 or more years, it will charge
the remaining carrying value to the retained earnings.
However, if the company has previously used building for
less than 30 years, say, 29 years, it will need to depreciate
the remaining carrying value over the remaining useful
life (which in this case happens to be one year period) and
charge to P&L.
3. Companies will need Lo idenLily and depreciaLe siqnilcanL
components with different useful lives separately. The
component approach is already allowed under current
AS 10, paragraph 8.3. Under AS 10, there seems to be a
choice in this matter; however, the Companies Bill requires
application of component accounting mandatorily when
relevant and material.
4. The application of component accounting is likely to cause
siqnilcanL chanqe in accounLinq lor replacemenL cosLs.
Currently, companies need to expense such costs in the
year of incurrence. Under the component accounting,
companies will capitalize these costs, with consequent
expensing of net carrying value of the replaced part.
5. In case of revaluation, depreciation will be based on the
revalued amount. Consequently, the ICAI guidance may
not apply and full depreciation on the revalued amount
is expecLed Lo have siqnilcanL neqaLive impacL on Lhe
sLaLemenL ol prolL and loss.
6. In case of assets with a nil remaining useful life on the
date the Companies Bill comes into effect, the transitional
provisions require that the carrying amount is written off
to retained earnings. In other words, the carrying value
never gets charged to the P&L account.
7. Overall, many companies may need to charge higher
depreciation in the P&L because of pruning of useful lives
as compared Lo Lhe earlier speciled raLes. However, in
some cases, the impact will be lower depreciation, i.e.,
when the useful lives are much longer compared to the
earlier speciled raLes, such as meLal poL line, bauxiLe
crushing and grinding section used in manufacture of
non-ferrous metals.
1. Both the existing Companies Act and the Companies Bill
require that where a company issues shares at a premium,
whether for cash or otherwise, a sum equal to the premium
received will be transferred to the securities premium
account. The existing Companies Act permits the same
utilization of securities premium to all companies. Under
the Companies Bill, utilization of securities premium will
be restricted for certain class of companies as may be
prescribed and whose lnancial sLaLemenL need Lo comply
with the accounting standards prescribed for such class
(referred to as prescribed class in this section). Given
below is the comparative analysis:
Purposes Companies
Act
Companies Bill
Prescribed
class
Others
Issue of fully paid
equity shares as
bonus shares
Yes Yes Yes
Issue of fully paid
preference shares as
bonus shares
Yes No Yes
Writing off
preliminary expenses
of the company
Yes No Yes
Writing off equity
share issue expenses
Yes Yes Yes
Writing off preference
share issue expenses
Yes No Yes
Writing off debenture
issue expenses
Yes No Yes
Providing for
premium payable
on redemption of
preference shares/
debentures
Yes No Yes
Buy-back of its own
shares or other
securities
Yes
(section 77A)
Yes Yes
2. The Companies Bill also states that prescribed class of
companies will provide for the premium, if any, payable
on redempLion ol prelerence shares ouL ol Lheir prolLs,
before the shares are redeemed.
3. For prescribed class of companies, the premium, if any,
payable on redemption of any preference shares issued on
or before the commencement of the Companies Bill will be
provided lor eiLher ouL ol Lhe prolLs ol Lhe company or ouL
of the companys securities premium account, before such
shares are redeemed.
Key impact
It appears that the Central Government has made changes
regarding utilization of securities premium to align accounting
with Ind-AS. Nonetheless the impact will be felt immediately in
lndian CAAP lnancial sLaLemenLs, because many companies
use the securities premium account to write off redemption
premium relating to debentures, preference shares and foreign
currency convertible bonds.
Potential issue
Except preference shares, no transition provisions have been
prescribed for companies impacted by the change. We believe
that where no transitional provisions are prescribed, the
change will apply to utilization of securities premium after the
enactment and will not cover past utilization.
Companies that have debentures redeemable after the
enactment at a premium, can make a provision for such
premium for the expired period and adjust the same to the
securities premium account before the Bill is enacted. The
prescribed class of companies may not be able to adjust the
premium, after the Bill is enacted.
Utilization of
securities premium
1. As in the existing Companies Act, the Companies Bill also
states that a company will not declare/pay dividend for any
lnancial year excepL:
(a) OuL ol prolLs ol Lhe company lor LhaL year alLer
depreciation
(b) OuL ol accumulaLed prolLs lor any previous lnancial
year(s) arrived at after providing for depreciation
(c) Out of both
(d) Out of money provided by Central Government/state
government for payment of dividend in pursuance of
any guarantee given by them.
2. Under the Companies Act, the Central Government is
empowered to allow a company to declare/pay dividend
lor any lnancial year ouL ol Lhe prolLs arrived aL wiLhouL
providing for depreciation, if the Government believes that
it is necessary to do so in public interest. However, such
power does not exist under the Bill.
3. Currently, a company needs to transfer the following
percenLaqe ol iLs prolL Lo reserves il iL declares dividend aL
a rate exceeding 10%. However, it is allowed to transfer an
increased amount to reserves, subject to compliance with
the prescribed rules.
Rate cf dividend Transfer to reserve - % of current
prchts
Not exceeding 10% Nil
10.0% to 12.5% 2.5%
12.5% to 15.0% 5.0%
15.0% to 20.0% 7.5%
Exceeding 20.0% 10.0%

The Companies Bill states that a company may, before
declaraLion ol dividend in any lnancial year, Lransler such
percenLaqe ol iLs prolLs lor LhaL lnancial year as iL may
consider appropriate to its reserves. Hence, the matter has
now been left to the discretion of respective companies.
4. The existing Companies Act states that the board may
declare interim dividend and that the requirements
concerninq lnal dividend, Lo Lhe exLenL relevanL, will apply
to interim dividend also. The Companies Bill contains the
lollowinq specilc requiremenLs lor inLerim dividend:
(a) lnLerim dividend may be declared durinq any lnancial
year ouL ol Lhe surplus in Lhe P&L and ouL ol prolLs
ol Lhe lnancial year in which such inLerim dividend is
sought to be declared.
(b) If a company has incurred loss during the current
lnancial year up Lo Lhe end ol Lhe quarLer
immediately preceding the date of declaration of
interim dividend, such interim dividend will not be
declared at a rate higher than the average dividends
declared by the company during the immediately
precedinq Lhree lnancial years.
5. New rules are yet to be framed to declare dividends out of
accumulaLed prolLs earned in earlier years and Lranslerred
to reserves.
6. Under the Bill, no dividend on equity shares can be
declared if the company fails to comply with the provisions
relating to acceptance and repayment of deposits.
Declaration and
payment of dividend
The existing Companies Act does not contain explicit
requirements on issue of bonus shares. However, regulations
96 and 97 of Table A of the Companies Act, deal with the
capiLalizaLion ol prolLs and reserves. 1hese Lwo requlaLions do
noL specilcally prohibiL capiLalizaLion ol revaluaLion reserve.
In the case of listed entities, the earlier SEBI DIP Guidelines and
now the SEBI ICDR regulations requires that bonus issue will be
made ouL ol lree reserves builL ouL ol qenuine prolLs or share
premium collected in cash only and prohibits capitalization
of revaluation reserves. The Guidance Note on Availability of
Revaluation Reserve for Issue of Bonus Shares issued by the
ICAI states that a company is not permitted to issue bonus
shares out of reserves created by revaluation of its assets.
Similar requirements are contained in AS 10 as well. However,
the Supreme Court has held in Bhagwati Developers v Peerless
General Finance & Investment Co. (2005) 62 SCL 574 that
an unlisted company can issue bonus shares out of
revaluation reserve.
The Companies Bill states that a company can issue fully paid
up bonus shares to its members out of free reserves, securities
premium and capital redemption reserve. However, a company
cannot issue bonus shares by capitalizing revaluation reserve.
The Bill also imposes certain pre-conditions for issuance of
bonus shares, such as:
(i) Articles of association should authorize the bonus issue
(ii) On the recommendation of the board the general body
meeting should authorize the issue of bonus shares
(iii) There should be no default in payment of statutory dues
to employees
(iv) There should be no default in payment of principal and
inLeresL on lxed deposiLs or debL securiLies issue
(v) Partly paid shares outstanding on the date of allotment
should be fully paid-up prior to issue of bonus shares
(vi) Bonus shares should not be issued in lieu of dividend
(vii) Any additional conditions as may be prescribed
Issue of bonus shares Registered valuers
1. The Companies Bill has introduced the concept of valuation
by a registered valuer. If a valuation is required to be made
in respect of any property, stocks, shares, debentures,
securities, goodwill or any other asset (referred to as the
assets) or net worth of a company or its liabilities under
the Companies Bill, it will be valued by a person with such
qualilcaLions and experience and reqisLered as a valuer in
a manner as may be prescribed. The audit committee, and
in its absence the board, will appoint the registered valuer
and decide the terms and conditions of appointment.
2. In case of non cash transaction involving directors, etc.,
the notice for approval of the resolution by the company or
holding company in general meeting will include the value
of the assets calculated by a registered valuer.
3. The registered valuer so appointed will:
(a) Make an impartial, true and fair valuation
(b) Exercise due diligence
(c) Make valuation in accordance with rules as may
be prescribed
(d) Not undertake any valuation of any asset(s) in which
he has any direct or indirect interest or becomes so
interested at any time during or after the valuation
of assets
Key impact
The Companies Bill requires registered valuer to be involved
only for valuation required under the Bill. There is no
requirement for involving registered valuer in other cases.
In case, certain valuations are to be used for dual purposes,
companies will likely need to involve registered valuers.
Otherwise, the same asset may get valued differently for
different purposes.
Potential issue
Since noLiled AS will also be parL ol Lhe Companies Bill, iL
appears that this requirement will also apply to valuations
required under the same. However, it is not absolutely clear
whether this requirement will apply to actuarial valuation
required under AS 15.
Also, some companies have in-house capabilities to perform
certain fair valuation, for example, fair valuation of real estate.
In these cases, the Companies Bill will still require involvement
of registered valuers.
Audit and
Auditcrs
1. Currently, the auditor is appointed on an annual basis and
holds ollce only Lill conclusion ol Lhe nexL ACM. Under Lhe
Bill, a company will appoinL audiLor aL iLs lrsL ACM. 1he
audiLor so appoinLed will hold iLs ollce Lill Lhe conclusion ol
the sixth AGM.
2. 1houqh Lhe audiLor will be appoinLed lor lve years, Lhe
matter relating to such appointment will be placed for
raLilcaLion aL each ACM.
3. Before appointing/re-appointing an auditor, a company will
obtain the following:
(a) Written consent of the auditor to such appointment,
and
(b) A cerLilcaLe lrom Lhe audiLor LhaL Lhe appoinLmenL,
if made, will be in accordance with the conditions as
may be prescribed. 1he cerLilcaLe will also indicaLe
wheLher Lhe audiLor saLisles eliqible criLeria lor
such appointment.
Appointment
of auditors
4. If no auditor is appointed/ re-appointed at the AGM, the
existing auditor will continue to be the auditor of the
company.
5. Currently, the listing agreement requires that the Audit
Committee constituted by a listed company should make
recommendation to the board for appointment/ re-
appointment/ replacement of statutory auditors. For non-
listed entities, no such requirement is applicable. Under
the Bill, all companies, which are required to constitute
an Audit Committee, will need to appoint an auditor after
taking into account the recommendations of
such committee.
Key impact
1. The Companies Act and the Companies Bill require an
approval from the Central Government to remove an
audiLor lrom his ollce belore expiry ol Lerm. Since
under Lhe Bill, an audiLor will be appoinLed lor a lveyear
term, companies will need to comply with the onerous
requirement of taking an approval from the Central
Government to remove the auditor during this term. Also
they will need to pass a special resolution at the general
meeting. This requires companies to consider long-term
perspective while appointing an auditor.
2. The prescribed class of non-listed companies, which are
required to constitute Audit Committee, will also need
to consider recommendations of the Committee for
appointing auditors.
1. Listed companies and companies belonging to prescribed
class of companies will not appoint or re-appoint the
auditor for:
(a) More Lhan Lwo Lerms ol lve consecuLive years, il Lhe
audiLor is an audiL lrm
(b) More Lhan one Lerm ol lve consecuLive years il Lhe
auditor is an individual
2. The auditor, who has completed his term, will not be
eligible for re-appointment as auditor in the same company
lor lve years lrom compleLion ol Lhe Lerm. 1his resLricLion
will also apply Lo Lhe audiL lrm, which has common
parLner(s) wiLh Lhe ouLqoinq audiL lrm aL Lhe Lime ol
appointment.
3. Every company, covered by these requirements, will need
to comply with the above requirements within three years
from the date of commencement of new law.
4. In addition to rotation of auditor, members of a company
may decide that:
(a) Auditing partner and his team will be rotated at
specilc inLervals, or
(b) The audit will be conducted by more than one auditor
(joint auditors).
Rotation of auditors
The RBI requires all banks, including banking companies,
to rotate auditors every four years. The IRDA requires all
insurance companies Lo roLaLe audiLors every lve years. AlLer
completing the term, two years cooling off period is required.
Other than that, currently, neither the Companies Act, nor
other laws require Indian companies to rotate their auditors.
Key impact
1. All listed companies, particularly companies, which have
long-term relationship with auditors, need to gear-up for
rotation. This will help companies to work closely with
proposed auditors and ensure compliance with strict
independence requirements upfront.
2. ln Lhe lrsL year ol audiL roLaLion, senior manaqemenL ol
the company will likely need to spend more time with the
new auditor so as to familiarize the new auditor with their
systems and processes.
3. Many global companies have listed subsidiaries in India.
1ypically, Lhey preler lrms, which are parL ol common
network, as their global auditors. This is expected to create
some challenging situations.
4. As a result of rotation, the learning curve experience
available to previous auditors will not be available to the
new auditors, who may have to understand the business
of the company, its systems and processes, from scratch.
Therefore, cost of audit is likely to increase both for
companies and audiL lrm. Various qlobal sLudies, includinq
sLudy conducLed by Lhe US Ceneral AccounLinq Ollce,
demonstrate this.
Potential issues
1. In accordance with the Bill, a listed/prescribed company
will noL appoinL or reappoinL an audiL lrm as audiLor lor
more Lhan Lwo Lerms ol lve consecuLive years. Companies
will need to comply with this requirement within three
years from the application of the new law. An issue is likely
to arise as to how the years of service before enactment of
new law should be considered for rotation. The following
two views seem possible.
(a) An audiL lrm may noL hold ollce as an audiLor ol
a listed company or of a company covered under
prescribed class of companies for more than 10
years. However, companies have been given a
three-year time frame to meet this requirement.
ll Lhis view is accepLed, an audiL lrm, which has
already completed seven or more years of service,
can conLinue Lo hold ollce lor Lhree more years. An
audiL lrm, which has compleLed six years ol service
on Lhe daLe ol enacLmenL, can conLinue Lo hold ollce
for four more years.
(b) ln accordance wiLh Lhe Companies Bill, an audiL lrm
can have Lwo maximum Lerms ol lve consecuLive
years each. Under the Companies Act, the company
has appointed auditors for term of one year each.
Hence, the same is not considered for deciding
the auditor rotation. In other words, the rotation
requirement will apply prospectively.
We suggest that the MCA may provide an appropriate
clarilcaLion on Lhis maLLer.
2. For banking companies, the RBI requires auditor rotation
every four years. For insurance companies, the IRDA
requires audiLor roLaLion every lve years. Since Lhese are
more stringent requirements, the same will prevail over
the Bill.
Similarly, an option given in the Companies Bill may not
override more stringent requirements prescribed by
other regulators. For instance, under the Companies Bill,
members of a company can decide whether they wish
to appoint joint auditor. However, IRDA mandates joint
audit in case of insurance companies. In this case, IRDA
requirement will prevail over the option given in the
Companies Bill.
3. The Bill states that if no auditor is appointed/re-appointed
at the AGM, the existing auditor will continue to be the
auditor of the company. We believe that this provision will
not apply if an auditor has already completed its maximum
tenure (5/10 years) as auditor. In such a case, it should be
mandatory for the company to appoint a new auditor.
Independence/
prohibited services
1. Under the Companies Bill, an auditor will be allowed to
provide only such other services to the company as are
approved by its board or audit committee. However, the
auditor is not allowed to render the following services
either directly or indirectly to the company, its holding or
subsidiary company:
Accounting and book keeping services
Internal audit
Desiqn and implemenLaLion ol any lnancial
information system
Actuarial services
Investment advisory services
Investment banking services
Renderinq ol ouLsourced lnancial services
Management services
Any other kind of services as may be prescribed
2. ln case ol an audiL lrm, Lhe above resLricLions also apply Lo
rendering of service by:
AudiL lrm iLsell
All of its partners
Its parent, subsidiary or associate entity
Any oLher enLiLy in which Lhe lrm or any ol iLs parLner
has siqnilcanL inluence/ conLrol, or whose name/
Lrade mark/brand is used by Lhe lrm or any ol iLs
partners
3. If prohibited, non-audit services are being rendered to a
company on or before the commencement of the Bill, the
auditor will need to comply with the above restrictions
belore Lhe end ol Lhe lrsL lnancial year alLer Lhe
enactment of the Companies Bill.
Key impact
1. Traditionally, companies have engaged auditors to provide
a range of non-audit services. This is because an auditor,
due to its continuous engagement with the company, is in
a better position to provide these services.
2. The Companies Bill does not make any distinction between
PIEs and Non-PIEs or based on the size/materiality of
the company being audited. Hence, the restrictions are
likely to apply equally in all cases. This is at variance from
independence requirement being followed in other parts of
the world, including the US.
Potential issue
It is clear that the above restrictions will prohibit an auditor
from rendering certain prescribed non audit services to the
company and its holding or subsidiary company in India.
What is not clear is whether the above restriction will apply to
rendering of non-audit services by the auditor or its network
lrm wherever locaLed Lo Lhe audiLee's holdinq company or
subsidiary located outside of India.
We believe that the requirements of the Bill cannot be extended
to a jurisdiction beyond India. Hence, providing non-audit
services to the auditees holding company or subsidiary located
ouLside ol lndia eiLher by Lhe audiLor or iLs neLwork lrm will noL
be prohibited.
The Companies Bill, while prohibiting auditor, to render certain
services does noL delne Lhe Lerms such as invesLmenL advisory
services and management services, which are likely to be
subject to varying interpretations.
For example, based on the IFAC Code of Ethics for Professional
Accountants, one can argue that management services
means assistance for carrying out such services for the
company which are the responsibilities of the management.
The term management responsibilities means leading and
direcLinq an enLiLy, includinq makinq siqnilcanL decisions
regarding the acquisition, deployment and control of human,
lnancial, physical and inLanqible resources." Hence, Lhe audiLor
should not step into management shoes. It will be useful if the
MCA provides clarity on the meaning of such terms to avoid
diverse practices.
No. Topic Companies Act Companies Bill
Eligibility for appointment
1. Individual Only if the person is a chartered accountant Similar requirement.
2. Firm All the partners practicing in India should be
qualiled lor appoinLmenL.
Ma|oriLy parLners pracLicinq in lndia should be qualiled lor
appointment.
3. LLP Not eligible for appointment Lliqible lor appoinLmenL il iL meeLs criLeria similar Lo Lhe lrm.
DisquaIihcaticns fcr the appcintment
Both under the Companies Act and the Companies Bill, the following persons are not eligible for appointment as an auditor of the company:
(a) A body corporate
(b) An ollcer or employee ol Lhe company
(c) A person who is a parLner, or who is in Lhe employmenL, ol an ollcer or employee ol Lhe company.
1. Holding of security A person holding security in the company is not
eligible for appointment.
A person will not be eligible for appointment if he himself, his
relaLive (Lerm noL lully delned) or parLner holds any securiLy
or interest in the company, its subsidiary, holding or associate
company or subsidiary of such holding company.
However, the relative may be allowed to hold security or
interest in the company with face value not exceeding `1
thousand or the amount as may be prescribed.
2. Indebtedness/
guarantee/security
A person who is indebted to the company for
an amount exceeding `1 thousand, or who has
given any guarantee or provided any security
in connection with third persons indebtedness
to the company for an amount exceeding `1
thousand is not eligible for appointment.
A person will not be eligible for appointment if he himself, his
relative or partner is indebted to the company, its subsidiary,
holding or associate company or subsidiary of such holding
company, in excess of such amount as may be prescribed.
A similar disqualilcaLion has also been provided in case ol
guarantee given or security provided in connection with
indebtedness of third person.
3. Business relationship No restrictions. A person or lrm will noL be eliqible lor appoinLmenL, il iL,
directly or indirectly, has business relationship (of such nature
as may be prescribed) with the company, its subsidiary, its
holding, or associate company or subsidiary of such holding
company or associate company.
4. Relatives
employment
No restrictions. A person, whose relative is a director or is in the employment
of the company as a director or key managerial personnel
(KMP), will not be eligible for appointment.
5. Full-time employment A person who is in full time employment
elsewhere is not eligible for appointment.
Similar requirement exists under the Companies Bill also.
6. Limit on maximum
number of companies
No company or its board will appoint/ reappoint
a person or lrm as iLs audiLor, il such person
or lrm, aL Lhe daLe ol appoinLmenL, hold
appointment as auditor of more than 20
companies. However, private companies are not
included in the maximum cap of 20 companies.
A person or a parLner ol a lrm will noL be eliqible lor
appointment/reappointment, if such person or partner at the
date of appointment, holds appointment as auditor of more
than 20 companies. Private companies are included in the
maximum cap of 20 companies.
7. Fraud No restriction. A person will not be eligible for appointment, if he has been
convicted by a court of an offence involving fraud and a period
of ten years has not elapsed from the date of such conviction.
8. Provision of services
other than audit
service
Discussed elsewhere in this publication Discussed elsewhere in this publication (refer section titled
Independence / prohibited services)
Eligibility, qualihcation
and disqualihcations
In addition, the Companies Act contains a general requirement that a person will not qualify for appointment as auditor of a
company il he is disqualiled, by virLue ol one or more ol Lhe above disqualilcaLions, lor appoinLmenL as audiLor ol any oLher body
corporate which is that companys subsidiary or holding company, or a subsidiary of that companys holding company, or would be so
disqualiled il Lhe body corporaLe was a company.
Key impact
1. 1he Companies Bill prescribes siqnilcanL addiLional
restrictions on appointment of auditor. This will require
both the company as well as auditor to track these aspects
closely and exercise strict measures to avoid potential
issues. For example, a person will not be eligible for
appointment if his relative or partner is indebted to the
company, its subsidiary, holding or associate company, or
subsidiary of such holding company etc. or holds securities
of those companies. If the government prescribes a long
list of relations and any of these relatives inadvertently
enter into a disqualifying transaction with the company,
its subsidiary, holding or associate company, etc., it may
require Lhe audiLor Lo vacaLe his/her ollce immediaLely.
Any such siLuaLion can creaLe siqnilcanL pracLical
dillculLies lor Lhe company.
While prescribing covered relationship, the Central
Government may like to consider the fact that a person may
noL be able Lo conLrol/ inluence oLher person il Lhe oLher
person is noL lnancially dependenL on him/her. Similarly,
a person may be able Lo inluence oLher persons who are
lnancially dependenL on him or her, even il Lhey are noL
covered in specilc lisL or relaLions. Consider an esLranqed
relaLive, who is lnancially independenL. He or she can buy
shares in a company audited by the person to whom he or
she is related and deliberately or inadvertently disqualify
the person from being the auditor of the company.
Hence, insLead ol lisLinq specilc relaLionship, Lhe CenLral
CovernmenL may explain LhaL clause (iii) in delniLion ol Lhe
Lerm "relaLive" will mean "lnancially dependenL person."
Financially dependent person can be explained to include
any other persons and/or their spouses who received more
Lhan hall ol Lheir lnancial supporL lor Lhe mosL recenL
lnancial year lrom Lhe concerned person."
2. The existing Act does not include private companies in the
maximum limit of 20 companies per partner. However, the
lCAl has lxed maximum limiL LhaL a person/ parLner cannoL
audit more 30 companies, including private companies, per
year. Under the new Bill, even private companies will be
included in the maximum limit of 20 companies that may
be audited by a partner. If the Companies Bill becomes
enactment it will prevail over the ICAI requirement. This
will siqnilcanLly reduce Lhe eliqibiliLy ol a person Lo be
appoinLed as audiLor. A company should obLain cerLilcaLe
of compliance with this requirement from the proposed
auditor, before agreeing to appoint the said person as
auditor.
Potential issues
1. ln Lhe conLexL ol disqualilcaLion, cerLain provisions reler Lo
person as well as lrm; while oLher provisions reler Lo person
and his relative. For example, point 3 in the above table
prohibiLs an audiLor, wheLher person or lrm, lrom enLerinq
into a business relationship. However, there is no such
restriction on relatives. Also, this clause does not restrict
partners from having business relation with the company.
In contrast, point 1 above prohibits person, his relative and
partner from having indebtedness; however, there is no
such resLricLion on Lhe lrm. 1his is likely Lo qive rise Lo Lhe
following key issues:
(a) Whether restrictions, which refer to person only, are
applicable Lo individual audiLor and noL Lhe lrm or iLs
partners?
(b) WheLher Lhe resLricLions applicable Lo lrm will also
apply Lo parLners in Lhe lrm? ll yes, will LhaL resLricLion
apply only to the partner auditing the company or all
parLners in Lhe lrm?
(c) Since the restriction on business relationship refer only
Lo person and lrm, iL seems LhaL Lhe same is noL likely
to apply to relatives of the person.
1he MCA needs Lo provide appropriaLe clarilcaLions on Lhese
matters.
2. In the context of point 3 above, it is very important as
to which business relationships will be prohibited by the
government. It is expected that normal or arms length
business relationship will not be prohibited. If this is not
done, it may create practical challenges, both for the
company and Lhe audiL lrm. For example, iL would be
unacceptable to prohibit an auditor from buying a soap that
its client has produced from a super market or from using
mobile services that its client is providing in normal course
of business at arms length price.
3. WheLher consolidaLed lnancial sLaLemenLs will be
regarded as a separate entity for computing the limit of
20 companies? It can be argued that SFS and CFS belong
to the same company and the restriction is prescribed in
Lerms ol number ol companies and noL number ol lnancial
statements. This suggests that SFS and CFS will be regarded
as one company. However, each subsidiary, associate or
|oinL venLure company in Lhe qroup audiLed by Lhe lrm will
be treated as separate company.
4. The full impact of the provisions are not yet clear, as the
rules are yet to be fully developed in many areas, such
as, in delninq Lhe Lerm relaLive or prohibiLed business
relationships or the amount of indebtedness, etc. As
suggested earlier, the Central Government may explain
LhaL clause (iii) in delniLion ol Lhe Lerm "relaLive" will mean
"lnancially dependenL person."
1. A company can remove the auditor before expiry of his
lveyear Lerm only by passinq special resoluLion aL an
AGM and after obtaining prior approval from the Central
Government.
2. ll an audiLor resiqns lrom Lhe company, iL will lle, wiLhin
a period of 30 days from the date of resignation, a
statement with the company and the registrar, indicating
reasons and other facts regarding resignation. No such
requirement exists under the current Companies Act.
3. The Tribunal is likely to direct a company to change its
audiLors, il iL is saLisled LhaL Lhe audiLor has, direcLly or
indirectly, acted in a fraudulent manner or abetted or
colluded in any fraud. The Tribunal may pass such order
either suo moto or on an application made to it by the
Central Government or by any person concerned. The
existing Companies Act does not contain this provision.
Key impact
The intention of the regulator seems to be to bring more
transparency and accountability both for companies and
auditors. Though there is no change in the requirement for
the Central Government approval to remove an auditor before
expiry of the term, the auditor will be appointed for a term of
lve consecuLive years under Lhe new law. Hence, a company
will noL be able Lo chanqe iLs audiLors lor lve years, wiLhouL
getting the Central Government approval.
Removal/resignation
of the auditor
Reporting
responsibilities
1. Considerinq specilc requiremenL Lo prepare and audiL CFS,
the Companies Bill requires that the auditor of a holding
company will have the right of access to the records of
all its subsidiaries in so far as it relates to consolidation
requirements.
2. The auditors report will include the following key
additional matters (compared to current reporting
requirements):
(a) ObservaLions or commenLs on lnancial LransacLions
or matters, which have any adverse effect on the
functioning of the company. Also, such observations/
comments will be read in the AGM and can be
inspected by any member. Currently, the Companies
Act requires the observations or comments of the
auditors with any adverse effect on the functioning of
the company to be given in bold/italic in the
audit report.
(b) Whether the company has adequate internal
lnancial conLrols sysLem in place and Lhe operaLinq
effectiveness of such controls. Currently, the
requirement under the CARO to report on internal
control matters is limited. It requires an auditor to
comment on whether the company has an adequate
internal control system commensurate with the size
of the company and the nature of its business, for the
purchase ol invenLory and lxed asseLs and lor Lhe
sale of goods and services.
3. In the existing Companies Act, auditors are required to
report on fraud in the CARO report. The Bill also requires
that if the auditor, in the course of audit, has reasons to
believe that an offence involving fraud is being or has
been commiLLed aqainsL Lhe company by iLs ollcers or
employees, he will immediately report the matter to the
Central Government within such time and manner as may
be prescribed.
4. 1he requiremenL Lo mainLain conldenLialiLy by audiLors
with respect to client matters, does not apply to reporting
matters under any regulation.
5. Currently, the Companies Act entitles but does not
require an auditor to attend AGM. Under the Companies
Bill, it will be mandatory for the auditor or its authorized
represenLaLive, who is also qualiled Lo be appoinLed as
an auditor, to attend the AGM, unless exempted by the
company.
Key impact
1. Any negative comment or reporting on the internal
conLrols or lraud may have siqnilcanL leqal consequences
including winding-up and cause reputational damage to the
company.
2. Reporting responsibilities of the auditor will increase
siqnilcanLly. For example, Lhe audiLor will be required Lo
reporL on adequacy and luncLioninq ol inLernal lnancial
control system in all areas. To avoid any adverse comment
in the auditors report, the management will need to
ensure adequacy and ellecLiveness ol inLernal lnancial
control in all the areas.
3. Accordinq Lo SA 265 CommunicaLinq Delciencies in
Internal Control to Those Charged with Governance and
Management, the auditor obtains an understanding of
internal control relevant to audit for designing its audit
procedures, but not for expressing an opinion on the
effectiveness of internal control. Hence, reporting on
inLernal lnancial conLrol beyond Lhe CARO requiremenL
does not fall within the scope of normal audit procedures.
Rather, the auditor will need to perform additional
procedures. This may increase time and cost involved in
the audit.
4. In accordance with SA 240 The Auditors Responsibilities
Relating to Fraud in an Audit of Financial Statements, the
primary responsibility for the prevention and detection of
fraud rests with both those charged with governance of the
entity and management. The auditor needs to maintain an
attitude of professional skepticism throughout the audit,
recognizing the possibility that a material misstatement
due to fraud could exist. However, due to inherent
limitations of an audit, there is an unavoidable risk that
some material misstatements will not be detected. Hence,
the auditors responsibility to report on fraud will not
absolve the board or audit committee of its responsibilities.
Potential issues
1. 1he requiremenL perLaininq Lo reporLinq on "lnancial
transactions or matters is not clear. One interpretation
is that the auditor is required to report whether any of
Lhe lnancial LransacLion or oLher maLLers can have an
adverse impact on the functioning of the company. If this
is correct, the auditor may need to comment on propriety
of transactions in order to meet its reporting obligations.
In our view, the intention of the regulator is not to require
an auditor to challenge and report on managements
judgment and propriety with respect to business decisions.
We suggest that the MCA/ ICAI may provide further
clarilcaLion/ quidance on Lhe maLLer.
2. In case of fraud, the Companies Bill does not state that
auditors reporting responsibility will arise only in case of
material frauds. This indicates that the auditor may need
to report all frauds to the Central Government noticed/
detected during the course of audit, irrespective of its size.
It will be more appropriate if the government frames rules
to require only material frauds to be reported.
3. Though the auditor has been given the right of access
to records of all subsidiaries pertaining to consolidation
requirements, no such right has been granted in the
context of associates and joint ventures.
4. It appears that all new reporting requirements will apply to
the audit of CFS also.
5. Under the existing Companies Act, auditors are required
to report on various matters in the CARO report. At this
stage, it is unclear what the reporting responsibilities will
be under the new legislation.
On contravention of law
1. If an auditor of a company contravenes any of the
requirements concerning appointment/ rotation, powers
and duties, prohibited services or signing of audit report,
Lhe audiLor will be punishable wiLh a lne, which will noL be
less than `25 thousand but may extend to `5 lakh.
2. If an auditor has contravened such provisions knowingly
or willfully with the intention to deceive the company or
its shareholders or creditors or tax authorities, he will
be punishable with imprisonment for a term, which may
exLend Lo one year and wiLh lne which will noL be less Lhan
`1 lakh but which may extend to `25 lakh.
3. Where an auditor has been convicted under point no 2
above, he will be liable to:
(i) Refund the remuneration received by him to the
company, and
(ii) Pay for damages to the company, statutory bodies
or authorities or to any other persons for loss
arising out of incorrect or misleading statements of
particulars made in his audit report.
4. Where, in case of audit of a company being conducted by
an audiL lrm, iL is proved LhaL Lhe parLner or parLners ol
Lhe audiL lrm has or have acLed in a lraudulenL manner
or abetted or colluded in any fraud by, or in relation to or
by, Lhe company or iLs direcLors or ollcers, Lhe liabiliLy,
whether civil or criminal as provided in this Bill or in any
other law for the time being in force, for such act will be of
Lhe parLner or parLners concerned ol Lhe audiL lrm and ol
Lhe lrm |oinLly and severally.
Prosecution by NFRA
5. NFRA may investigate either suo moto or on a reference
made to it by the Central Government on matters of
prolessional or oLher misconducL by any member/lrm ol
chartered accountants. If professional or other misconduct
is proved, NFRA has the power to make order for:
Penalties on auditor
(a) Imposing penalty of:
(i) Not less than `1 lakh but which may extend
Lo lve Limes ol Lhe lees received, in case ol
individuals, and
(ii) Not less than `10 lakh but which may extend
to ten times of the fees received, in case of
lrms.
(b) Debarrinq Lhe member or Lhe lrm lrom enqaqinq
himself or itself from practice as member of the
ICAI for a minimum period of six months or for such
higher period not exceeding ten years as may be
decided by the NFRA.
Class action
6. Members or depositors or any class of them may claim
damages or compensation or demand any other suitable
acLion lrom or aqainsL Lhe audiLor includinq audiL lrm ol
the company for any improper or misleading statement
made in his audit report or for any fraudulent, unlawful
or wrongful act or conduct. Where the members or
depositors seek any damages or compensation or demand
any oLher suiLable acLion lrom or aqainsL an audiL lrm,
Lhe liabiliLy will be ol Lhe lrm as well as ol each parLner
who was involved in making any improper or misleading
statement of particulars in the audit report or who acted in
a fraudulent, unlawful or wrongful manner.
Limited Liability Partnership
7. 1he CA AcL has been amended Lo allow audiL lrms
to function as LLPs. Under the Companies Bill, if it is
proved LhaL Lhe parLner or parLners ol Lhe audiL lrm
has or have acted in a fraudulent manner or abetted
or colluded in any fraud by, or in relation to or by, the
company or iLs direcLors or ollcers, Lhe audiL lrm is held
responsible jointly and severally with the erring partners.
Based on Lhese liabiliLy provisions, benelLs ol Lhe LLP
form of partnership is not likely to be available to audit
professionals in the case of a fraud or fraudulent behavior.
Cost accounting
and audit
1. On the lines of the Companies Act, the Companies Bill
empowers Lhe CenLral CovernmenL Lo require speciled
class of companies to maintain cost accounts and get cost
audit done. Given below are some key changes:
(a) No specilc approval ol Lhe CenLral CovernmenL will
be required for appointment of the Cost Auditor.
(b) Since most of the requirements concerning statutory
auditor are also applicable to the cost auditor, key
changes explained for statutory audit will apply in
case of cost audit also.
(c) Cost auditor will submit its report to the board of
directors, instead of the Central Government. The
board will submit the report to the government,
alongwith full information and explanation on each
reservaLion/ qualilcaLion.
(d) The cost auditor will need to comply with the cost
auditing standards, issued by the ICWAI.
1. The Companies Bill requires that every company with net
worth of `500 crore or more, or turnover of `1,000 crore
or more or a neL prolL ol `5 crore or more during any
lnancial year will consLiLuLe a CSR commiLLee.
2. The CSR committee will consist of three or more directors,
out of which at least one director will be an independent
director.
3. The CSR committee will:
(a) Formulate and recommend to the board, a CSR
policy, which will indicate the activities to be
undertaken by the company
(b) Recommend the amount of expenditure to be
incurred on the activities referred to in the CSR
policy
(c) Monitor CSR policy from time to time
4. The board will ensure that company spends, in every
lnancial year, aL leasL 27 ol iLs averaqe neL prolLs made
durinq Lhe Lhree immediaLely precedinq lnancial years. For
Lhis purpose, Lhe averaqe neL prolL will be calculaLed in
accordance with the clause 198.
5. The company will give preference to local area and areas
around where it operates, for spending the amount
earmarked for CSR activities.
6. The board will approve the CSR policy and disclose its
contents in the board report and place it on the companys
website.
Corporate Social
Responsibility
Corporate
Governance
7. If a company fails to spend such amount, the board will, in
its report specify the reasons for not spending the amount.
8. Schedule VII of the Bill sets out the activities, which may
be included by companies in their CSR policies. These
activities relate to (a) eradicating extreme hunger and
poverty (b) promotion of education (c) promoting gender
equality and empowering women (d) reducing child
mortality and improving maternal health (e) combating
HIV, AIDs, malaria and other diseases (f) ensuring
environmental sustainability (g) employment enhancing
vocational skills (h) social business projects (i) contribution
to certain funds and other matters.
Currently, there is no mandatory requirement on companies
Lo spend any parL ol Lheir prolL on CSR acLiviLies. 1he MCA
has issued Guidelines on Social, Environmental & Economic
Responsibilities of Business, for voluntary adoption by
companies. In addition, the SEBI has mandated top-100 listed
entities, based on market capitalization at BSE and NSE, to
include business responsibility report in their Annual Report.
Key impact
1. The Companies Bill does not prescribe any penal provision
if a company fails to spend amount on CSR activities. The
board will need to explain reasons for non-compliance in its
report.
2. The Companies Bill has set threshold of `5 crore neL prolL
for applicability of CSR requirements. In comparative
terms, this seems to be on lower side vis--vis net-worth
and turnover thresholds of `500 crore and `1,000 crore,
respectively. This may result in companies getting covered
under the CSR requirements, even when they dont meet
net-worth/ turnover criteria.
3. Due Lo deLerminaLion ol averaqe neL prolL in accordance
with clause 198, actual expenditure on CSR activities for a
company may be higher/ lower than 2% of its average net
prolL lor Lhe pasL Lhree years deLermined in accordance
with the P&L.
Potential issues
1. It is not absolutely clear whether a company will need
Lo creaLe provision in Lhe lnancial sLaLemenLs Loward
unspent amount if it fails to spend 2% amount of the
CSR activities in a particular year. We believe that the
resolution of this issue may depend upon the legal/ other
consequences, which may follow, if a company fails to
spend the requisite amount in a particular year. For
example, if a company can get away with an explanation
in the boards report and need not make good past
shortfall in the future period, there may be no need to
create provision. However, if the company needs to incur
the amount currently unspent in future periods legally, a
provision in accordance with AS 29 may be needed.
2. Questions may arise with regard to tax deductibility of
expenditure incurred on CSR activities. One argument is
LhaL iL is in Lhe naLure ol allocaLion ol prolL and, Lherelore,
will be not allowed as deduction for tax purposes. However,
the counter argument is that there is a legal obligation
on the company to incur such expenses though they are
deLermined as 7 ol neL prolL. Nonincurrence ol Lhese
costs may have legal/ other regulatory implications on
Lhe company. Also, lrom lnancial reporLinq perspecLive,
iL will be LreaLed as expense and noL disLribuLion ol prolL.
Hence, it should be allowed as deduction for computation
of taxable income. In certain past cases also, voluntary CSR
expenses have been treated as tax deductible. To avoid
legal complications, the CBDT may clarify that CSR expense
will be treated as allowable expenditure under section 37 of
the Income-tax Act.
.
Serious Fraud
Investigation CIhce
1. Currently, the SFIO has been set-up by the Central
Government under resolution No. 45011/16/2003-Adm-I
dated 2 July 2003. Under the Companies Bill, statutory
status will be conferred upon the SFIO. Till the time SFIO
is established under the Bill, the SFIO previously set-up by
the Central Government will be deemed to be SFIO under
the Bill.
2. The Central Government may assign investigation into
the affairs of a company to SFIO (i) on receipt of a report
of the registrar or inspector, (ii) on intimation of a special
resolution passed by a company that its affairs are
required to be investigated, (iii) in public interest, or (iv) on
request from any department of the Central Government/
state government.
3. Where any case has been assigned by the Central
Government to SFIO for investigation, no other
investigating agency of the Central Government/state
government will proceed with investigation in such cases.
4. If authorized by the Central Government, SFIO will have
the power to arrest in respect of certain offences, which
attract the punishment for fraud. Those offences will be
cognizable and the person accused of any such offence
will be released on bail only upon lullllinq sLipulaLed
conditions.
5. lnvesLiqaLion reporL ol SFlO lled wiLh Lhe special courL lor
lraminq ol charqes will be deemed as a reporL lled by a
police ollcer.
6. Stringent penalties are prescribed for fraud-related
offences.
7. SFIO will share any information or documents, with any
investigating agency, state government, police authority
or Income-tax authorities, which may be relevant or
useful for them in respect of any offence or matter being
investigated by them under any other law.
Class Action
Unlike a securities class action suit in the US, where a class of
securities-holder can ask for compensation/damages for loss
caused to them by the acts of company or its management
in violaLion ol applicable requlaLions, Lhere was no specilc
provision available under the existing Companies Act to
ask for market based compensation or damages by class of
shareholders or depositors or prospective investors.
The companies Bill has taken a step to protect interest of
investors and has introduced class action proceeding under
section 37 and 245 of the Bill.
1. Requisite number of members or depositors or any class of
Lhem may lle an applicaLion belore Lhe NaLional Company
Law Tribunal (NCLT), if they are of opinion that the
Management or control of the affairs of the company are
being conducted in a manner prejudicial to interests of the
Company or its members or depositors.
2. The Companies Bill under clause 245 provides right to
the members and depositors, having common interest,
to form a group and initiate class action suit against
delaulLinq company, direcLors, ollcers, experLs, audiLors
and parLners ol Lhe audiL lrms lor claiminq compensaLion
or damages. The suit can be initiated by the members
and / or depositors if they collectively believe that the
management or conduct of the affairs of the company is
being conducted in a manner prejudicial to the interests of
the company or its members or depositors. Clause 245 (1)
of the Bill provides that at least 100 members / depositors
or members / depositors representing prescribed % of
the total number of members / depositors or holding
prescribed 7 ol Lhe LoLal share capiLal / deposiLs can lle an
application before the Tribunal for seeking the following
order
a) restrain the company and its directors to act in
contravention to its articles, memorandum, resolution
or provisions of the Act.
b) Initiate action for claiming damages and compensation
against the company, its directors (including
lndependenL DirecLors), audiLors (includinq audiL lrm
and Partners involved), experts /advisor/consultant
or any other person for any improper or misleading
statement or any fraudulent, unlawful or wrongful act
or conduct.
3. Section 37 of the bill also provides that a suit may be
lled or any oLher acLion may be Laken under secLion 3^
or section 35 (deals with criminal and civil liability for
misstatement in the prospectus) or section 36 (deals with
fraudulently inducing persons to invest money) by any
person, group of persons or any association of persons
affected by any misleading statement or the inclusion or
omission of any matter in the prospectus. Action could be
iniLiaLed aqainsL Lhe speciled persons under Lhe bill
a) Director of the company at the time of the issue of the
prospectus;
b )any person who has authorised himself to be named
and is named in the prospectus as a director of the
company,
c) a promoter of the company;
d) any person who has authorised the issue of the
prospectus; and
e) any person who is an expert referred to in sub-section
(5) of section 26)
Key impact
1. In addition to the compensation or damages which could
be granted by the Tribunal under clause 245(1)(vii),
Clause 245 (7) provides that if any company or person
fails to comply with an order passed by Tribunal then the
company and every ollcer who has delaulLed same shall
be punishable with:
a) Fine which shall noL be less Lhan lve lakh rupees buL
which may exLend Lo LwenLylve lakh rupees and
b) Lvery ollcer ol Lhe company who is in delaulL shall be
punishable with imprisonment for a term which may
exLend Lo Lhree years and wiLh lne which shall noL be
less Lhan LwenLylve Lhousand rupees buL which may
extend to one lakh rupees.
SecLion 2(60) delnes "Ollcer who is in delaulL" and includes
under clause (vi) every director, in respect of a contravention
of any of the provisions of this Act, who is aware of such
contravention by virtue of the receipt by him of any proceedings
of the Board or participation in such proceedings without
objecting to the same, or where such contravention had taken
place with his consent or connivance not been committed.
2. In addition to the compensation which can be claimed by
the affected group of subscribers under clause 35 of the
Bill, they can also proceed to take criminal action against
the company, its directors and promoters, individuals
who consented to be Directors as part of the prospectus,
person who authorized to release the prospectus and
experts under clause 447 of the bill. Clause 447 of the
Bill provides that any person who is found to be guilty of
fraud, shall be punishable with imprisonment for a term
which shall not be less than six months but which may
exLend Lo Len years and shall also be liable Lo lne which
shall not be less than the amount involved in the fraud, but
which may extend to three times the amount involved in
the fraud. Further, where the fraud in question involves
public interest, the term of imprisonment shall not be less
than three years.
Potential issues
1. Compensation for misstatements: In the US, there is a
legally accepted presumption that the price of shares in an
open and developed markeL is a relecLion ol all maLerial
information that is publicly available in the marketplace
about those shares, including false and misleading
information issued by a company. We will have to wait to
see how Tribunal will view similar claims in India as the
clause 37 and clause 245 does not restrict the claim to be
made only for the material misstatements. There is high
probability that subscribers / members may make claims
based on any misstatements made by the company or its
direcLors or ollcers or audiLors made available Lhrouqh
prospecLus, reporLs or press release based on ellcienL
market theory.
2. Litigation funding: While the concept of Plaintiffs BAR as
prevalent in the US is not allowed to be formed in India
due to restrictions on Advocates in India from charging
contingent fees by the Bar Council of India. There is
however growing interest of international ligation funds to
get involved in Indian litigations and share part of the gains
from the settlement or compensation amount received
through large scale claims. Further, the Bill also provides
that the Investors Protection fund can be used for meeting
liLiqaLion cosL ol llinq class acLion suiLs under clause 37
and clause 245 of the Bill.
3. Litigation cost of defendants: The bill also does not
provide for a looser to pay for litigation cost of defendant.
Maximum cost that can be ordered to be paid by Tribunal
for frivolous and vexatious claim capped to One Lac
rupees. This will encourage various class actions suits
against the companies and may cause reputation risks and
litigation cost for defending even frivolous claims.
4. 4.Inadequate coverage under D&O insurance cover: There
will be need to review the coverage of the D&O cover from
the sum insured and also eventualities covered especially
il Lhe DirecLors and ollcers are lound Lo be quilLy under
clause 447 of the Bill or insolvency of the company.
Directors Independent directors
1. Under the Companies Bill, each company will need to have
minimum one director who stayed in India for at least 182
days in the previous calendar year. The Companies Act
does not contain this requirement.
2. The Companies Bill will require prescribed class of
companies to have at least one woman director on
the board. Existing companies will be given a one-year
transition period to comply with this requirement.
3. Under the Companies Act, a public company either with (a)
paid-up capital of `5 crore or more, or (b) 1,000 or more
small shareholders, may have a director elected by the
small shareholders. Under the Company Bill, only listed
companies will be given an option to have one director
elected by the small shareholders.
4. Under the Companies Act, a public company or a private
company, which is a subsidiary of a public company
can have a maximum of 12 directors or the number
mentioned in its Articles. Any further increase in the
number of directors requires an approval from the Central
Government. Under the Companies Bill, this limit has been
set at 15 and will be applicable to all companies. For any
further increase in number of directors, a company will
need to pass a special resolution at its General Meeting.
There will not be any need to obtain an approval from the
Central Government.
5. Under the Companies Act, a person cannot hold
directorship in more than 15 companies. Under the
Companies Bill, a person will be able to become director
of 20 companies. However, out of this, not more than 10
companies can be public companies.
6. Keepinq in view Lhe lduciary capaciLy ol direcLors, Lhe
Companies Bill has prescribed duties of directors. A
director of the company will (i) act in accordance with the
articles of the company, (ii) act in good faith to promote
the objects of the company, (iii) exercise his duties with
due and reasonable care, skill and diligence, (iv) not get
involved in a situation in which he may have a direct or
indirecL inLeresL LhaL conlicLs, or possibly may conlicL,
with the interest of the company, (v) not achieve or
attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates, and (vi)
noL assiqn his ollce.
1. Currently, clause 49 of the listing agreement requires
that a board of a listed company will have an optimum
combination of executive and non-executive directors with
not less than 50% of the board comprising non-executive
directors. It also provides that where the Chairman of the
board is a non-executive director, at least one-third of the
board should comprise independent directors. In case the
Chairman is an executive director, at least half of the board
should comprise independent directors.
The Companies Bill states that every listed company will
have atleast one-third of total number of directors as
independent directors, with any fraction to be rounded
off as one. Unlike the listing agreement, the Companies
Bill does noL conLain any specilc requiremenL lor 507
independent directors if the Chairman of the board is an
executive director.
2. Under the Companies Bill, the Central Government will have
the power to prescribe minimum number of independent
directors in other class of public companies. The Companies
Act does not contain any such requirement.
3. The meaning of the term independent director given
in the Companies Bill contains most of the attributes
prescribed in the listing agreement. The Bill, however,
contains certain additional criteria, e.g.,:
(a) An independent director should be a person of
integrity and possess relevant expertise and
experience.
(b) The language used in clause 49 suggests that a
person to be appointed as independent director
should not have any material pecuniary relationship/
transactions with the company, its promoters, its
directors or its holding company, its subsidiaries
and associates, which will affect independence of
the director. The listing agreement does not specify
any particular timeframe to be considered in this
regard. However, the Companies Bill states that such
relationship should not have existed either in the
currenL lnancial year or immediaLely precedinq
two years.
Also, the Companies Bill covers all pecuniary
relationships, instead of material pecuniary
relationships covered under the listing agreement.
(c) A person will not be eligible to be appointed as
independent director, if parties listed in (b) above
have/had pecuniary relationship/transactions
exceeding prescribed amount with a relative of the
said person. The listing agreement does not prohibit
appointment based on pecuniary relationship/
transactions with relatives..
(d) Clause 49 prohibits a person from being appointed
as independent director, if that person is/was a
parLner/execuLive in sLaLuLory audiL lrm, inLernal
audiL lrm, leqal lrm and/or consulLinq lrm(s), which
have association with the company. The Companies
Bill also prohibits a person from being appointed as
independent director if that persons relative is/was
a parLner/execuLive in Lhe said lrm.
(e) Under the Companies Bill, the Central Government
may prescribe addiLional qualilcaLions lor an
independent director.
(f) Clause 49 states that the nominee directors
appointed by an institution, which has invested in or
lent to the company, is deemed to be an independent
director. The Companies Bill, however, states that an
independent director will be a director other than the
nominee director.
(g) In accordance with the Companies Bill, an
independent director should not be a Chief Executive
or director, by whatever name called, of any non-
prolL orqanizaLion, which receives 257 or more ol
its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate
company or that holds 2% or more of the total voting
power of the company.
4. The Companies Bill requires that every independent
direcLor, aL Lhe lrsL meeLinq ol Lhe board in which he
parLicipaLes as a direcLor and LherealLer aL Lhe lrsL
meeLinq ol Lhe board in every lnancial year or whenever
there is any change in the circumstances which may affect
his status as an independent director, will have to give a
declaration that he meets the criteria of independence.
The listing agreement requires that an independent
director, prior to the appointment, disclose their
shareholding (both own or held by / for other persons on
a benelcial basis) in Lhe lisLed company in which Lhey are
proposed to be appointed.
5. The Companies Bill requires that the independent director
may be selected from a data bank maintained by a body,
insLiLuLe or associaLion, as may be noLiled by Lhe CenLral
Government.
6. Under the Companies Bill, an independent director will not
be entitled to any stock options in the company. Under the
listing agreement, there is no such prohibition. Rather,
maximum limit on stock options granted to independent
direcLors can be lxed by shareholders' resoluLion.
Key impact
1. The SEBI may need to amend the listing agreement to
bring it in line with the Companies Bill. Till such time, listed
companies will need to follow the requirement of the listing
agreement/ Companies Bill, whichever is more stringent.
2. Considering additional criteria prescribed in the
Companies Bill, many listed companies may need to revisit
appointment of their independent directors.
3. The Companies Bill lays down various restrictions, on
the person as well as its relatives, for being eligible to be
appointed as independent director. If the government
prescribes a long list of relations, the company, the person
who is or seeking to be an independent director and the
relatives of such person will have to keep track of this, to
ensure compliance on a going forward basis. For example,
a company cannot appoint any person as an independent
director if that person or his relative is/was a partner/
execuLive in Lhe precedinq Lhree lnancial years in Lhe lrm
of auditors of the company.
Potential issues
1. In accordance with the Bill, an independent director should
be a person of integrity and possess relevant expertise and
experience. However, it does not elaborate the relevant
experience or expertise, which a company will consider.
This will require each company to exercise its judgment.
2. The Bill states that an independent director will not be
entitled to any stock option. The Bill is not clear as to how
a company will deal with stock options granted in the past
and which are outstanding at the date of its enactment. It
seems possible that a company will likely need to cancel/
forfeit these stock options immediately.
Code of conduct for
independent directors
The listing agreement requires the board of directors to lay
down a Code of Conduct for all board members and the
senior management of the company. The code is to be posted
on the company website and all board members and senior
manaqemenL personnel are required Lo allrm compliance
with the same on an annual basis.
The Companies Bill lays down detailed Code for independent
directors containing detailed guidelines for professional
conduct, roles and responsibilities. The company and
independent directors are required to comply with the same.
Some key examples of guidelines are:
(a) Uphold ethical standards of integrity and probity
(b) Act objectively and constructively while exercising his
duties
(c) Exercise responsibilities in a manner in the
interest of the company
(d) DevoLe sullcienL Lime and aLLenLion Lo his prolessional
obligations for informed and balanced decision making
(e) Not allow any extraneous considerations to vitiate his
objectivity and independent judgment
(f) Not abuse his position to the detriment of the company
or its shareholders or for personal advantage
(g) Bring an objective view in the evaluation of the
performance of board and management
(h) Safeguard the interests of all stakeholders, particularly
the minority shareholders
(i) Undertake appropriate induction and regularly update
and refresh their skills, knowledge and familiarity with the
company
(j) Keep themselves well informed about the company and
the external environment in which it operates
(k) SaLisly Lhemselves on Lhe inLeqriLy ol lnancial
inlormaLion and LhaL lnancial conLrols and Lhe sysLems
of risk management are robust and defensible.
(l) Seek appropriaLe clarilcaLion or amplilcaLion ol
information and, where necessary, take and follow
appropriate professional advice and opinion of outside
experts
(m) Pay sullcienL aLLenLion and ensure LhaL adequaLe
deliberations are held before approving related party
transactions and assure themselves that the same are in
the interest of the company
(n) Report concerns about unethical behavior, actual or
suspected fraud or violation of the companys code of
conduct or ethics policy.
Key impact
Most of the attributes of independent directors prescribed in
the Companies Bill are qualitative in nature. Therefore, it may
not be possible to demonstrate compliance or otherwise with
these criteria. Accordingly, it is possible that these aspects may
become sub|ecL maLLer ol siqnilcanL debaLe.
Liabilities of
independent director
Under the Bill, an independent director and a non-executive
director not being promoter or KMP, will be held liable, only in
respect of such acts of omission or commission by a company,
which had occurred with his knowledge, attributable through
board processes, and with his consent or connivance or where
he had not acted diligently. There is no such provision under the
Companies Act; however the MCA has included such provision
vide general circular no. 8/2011 dated 25 March 2011
directing all the RDs, ROCs and OLs to spare the independent
directors and nominee directors from routine prosecution under
the Companies Act.
1. Under the Companies Bill, each listed company and such
other class of companies, as may be prescribed, will
constitute an audit committee. Currently, the Companies
Act requires all public companies with paid-up capital of
not less than `5 crore to constitute an Audit Committee.
The listing agreement requires all listed companies to
constitute an audit committee.
2. Under the Companies Bill, an audit committee will
comprise minimum of three directors with independent
directors forming a majority. Under the Companies Act,
audit committee should consist of minimum three directors
of which two-third members will be directors, other than
managing/whole-time directors. The listing agreement
requires the audit committee to comprise minimum three
directors with two-third members being independent
directors.
3. The Companies Bill requires that majority of audit
committee members including its chairperson will have
an abiliLy Lo read and undersLand Lhe lnancial sLaLemenL.
1here is no qualilcaLion prescribed under Lhe exisLinq
Companies Act. In contrast, the listing agreement requires
LhaL all members should be lnancially liLeraLe and aL leasL
one member should have accounLinq or relaLed lnancial
management expertise.
4. The existing companies are allowed a one-year timeline for
reconstituting its audit committee in accordance with the
new requirements.
5. 1he exisLinq Companies AcL does noL delne role and
responsibilities of the audit committee in detail; rather,
it states that the board will determine the terms of
reference. The listing agreement lists down the role of the
audit committee in detail. The Companies Bill prescribes
cerLain specilc responsibiliLies ol Lhe audiL commiLLee and
states that the board of directors will prescribe further
terms of reference. Some key additional responsibilities
prescribed in the Bill vis--vis listing agreement include:
(a) To review and monitor the auditors independence
and effectiveness of the audit process
(b) Approval Lo any new or any subsequenL modilcaLion
to transactions of the company with related parties
(c) Scrutiny of inter-corporate loans and investments
Audit committee
(d) Valuation of undertakings or assets of the company,
if necessary
(e) Monitoring the end use of funds raised through
public offers and related matters instead of reviewing
the monitoring report prepared by the monitoring
agency.
6. Each listed company and such other class of companies,
as may be prescribed, will establish a vigil mechanism
for directors and employees to report genuine concerns.
The vigil mechanism will provide for adequate safeguards
against victimization of persons who use such mechanism
and make provision for direct access to the chairperson of
the Audit Committee in appropriate or exceptional cases.
Under the listing agreement, whistle blower policy is a
non-mandatory requirement.
7. In case of any contravention of these requirements, the
company will be punishable wiLh a lne, which will noL be
less than `1 lakh but which may extend to `5 lakh. Every
ollcer ol Lhe company who is in delaulL will be punishable
with imprisonment for a term, which may extend to one
year or wiLh lne, which will noL be less Lhan `25 thousand
but which may extend `1 lakh or with both.
Key impact
1. Non-listed companies, which belong to class of companies
as prescribed by the government and thereby required
to constitute an audit committee, will need to revisit the
composition in light of new requirements.
2. Prima facie, it appears that the composition of audit
committee constituted as per clause 49 of the listing
agreement will be in compliance with the Companies
Bill requirement. However, any change in independent
direcLors, due Lo independenL direcLor qualilcaLion criLeria
discussed earlier, will trigger change in the composition of
the Audit Committee as well.
Nomination and remuneration committee
1. Under the existing Companies Act, Schedule XIII requires
the approval by the remuneration committee for payment
of managerial remuneration when a company has no
prolLs or inadequaLe prolLs. 1he lisLinq aqreemenL
contains provisions regarding NRC as a non-mandatory
requirement. The Companies Bill will mandate all listed
companies and such other class of companies as may be
prescribed to constitute NRC.
2. The NRC will consist of three or more non-executive
directors out of which not less than one half will be
independent directors.
3. 1he NRC will idenLily persons who are qualiled Lo
become directors and who may be appointed in senior
management in accordance with the criteria laid down.
NRC will recommend to the board their appointment
and removal. It will also carry out an evaluation of every
directors performance.
4. The NRC will formulate criteria for determining
qualilcaLions, posiLive aLLribuLes and independence ol a
director and recommend to the board a policy, relating
to the remuneration for the directors, KMP and other
employees. Such policy will be disclosed in the
boards report.
Stakeholders Relationship Committee
1. The board of a company, which consists of more than
1,000 shareholders, debenture-holders, deposit-holders
and any other security holders at any time during a
lnancial year will consLiLuLe an SRC. 1he SRC will comprise
a chairperson who will be a non-executive director and
such other members as may be decided by the board.
2. The SRC will consider and resolve the grievances of
security holders of the company.
3. Currently, the listing agreement requires listed companies
to constitute a board committee under the chairmanship of
a nonexecuLive direcLor. Such commiLLee specilcally looks
into the redressal of shareholder and investors complaints.
This committee is designated as `Shareholders/Investors
Grievance Committee.
Key impact
Publication and public availability of policy for remuneration
to directors, KMPs and other employees in the board
report is likely to put a company in a competitive
disadvantageous situation.
Other committees
1. The existing Companies Act does not require companies,
except producer companies, to appoint internal auditor
and have internal audit done. However, paragraph 4(vii) of
the CARO requires an auditor to report on the following:
In the case of listed companies and/or other companies
having a paid-up capital and reserves exceeding `50 lakh
as aL Lhe commencemenL ol Lhe lnancial year concerned,
or having an average annual turnover exceeding `5
crore lor a period ol Lhree consecuLive lnancial years
immediaLely precedinq Lhe lnancial year concerned,
whether the company has an internal audit system
commensurate with its size and nature of its business.
The Companies Bill states that such class or class of
companies, as may be prescribed, will appoint an internal
auditor to conduct internal audit of the functions and
activities of the company.
2. Such internal auditor will either be a chartered accountant
or a cost accountant, or such other professional as may be
decided by the board.
3. The Central Government may, by rules, prescribe the
manner and the intervals in which the internal audit shall
be conducted and reported to the Board.
Key impact
The Companies Bill does not require a company to appoint only
an external agency to get internal audit done. A company may
either engage external agency or have internal resources to
conduct internal audit.
Internal audit
1he Companies Bill delnes Lhe Lerm "relaLive" as "wiLh
reference to any person means anyone who is related to
another, if:
(i) They are members of a Hindu Undivided Family
(ii) They are husband and wife, or
(iii) One person is related to the other in such manner as may
be prescribed
The existing Companies Act also explains the term relative
in a similar manner. It has prescribed a list of persons (see next
page) who will be treated as relative under (iii) above.
Dehnition oI relative
ReIated party
transactions,
Icans and
investments
Dehnition oI related
party
Father Mother
(including step-mother)
Son
(including step-son)
Sons wife Daughter (including
step-daughter)
Fathers father.
Fathers mother Mothers mother Mothers father
Sons son Sons Sons wife Sons daughter
Sons daughters
husband
Daughters husband Daughters son
Daughters sons
wife
Daughters daughter Daughters
daughters husband
Brother (including
step-brother)
Brothers wife Sister (including
step-sister)
Sisters husband

The Central Government has still not prescribed list of
relations that will be covered under the Companies Bill. The
discussion elsewhere in this publication suggests that this
delniLion is likely Lo have siqnilcanL impacL on aspecLs such as
appoinLmenL, qualilcaLion and disqualilcaLion ol audiLor and
independent directors. While prescribing covered relationship,
the Central Government should consider this aspect and the
lacL LhaL a person may noL be able Lo conLrol/ inluence oLher
person il Lhe oLher person is noL lnancially dependenL on him/
her. Similarly, a person may be able Lo inluence oLher persons
who are lnancially dependenL on him or her, even il Lhey are
noL covered in specilc lisL or relaLions.
Hence, insLead ol lisLinq specilc relaLionship, Lhe qovernmenL
may explain clause (iii) above Lo mean "lnancially dependenL
person. Financially dependent person can be explained to
include any other persons and/or their spouses who received
more Lhan hall ol Lheir lnancial supporL lor Lhe mosL recenL
lnancial year lrom Lhe concerned person. Consider an
esLranqed relaLive, who is lnancially independenL. He can
buy shares in a company audited by the person to whom he is
related and deliberately or inadvertently disqualify the person
from being the auditor of the company.
1he Companies Bill delnes Lhe Lerm "relaLed parLy" Lo mean:
(i) A director or his relative
(ii) KMP or his relative
(iii) A lrm, in which a direcLor, manaqer or his relaLive is a
partner
(iv) A private company in which a director or manager is a
member or director
(v) A public company in which a director or manager is a
director or holds along with his relatives, more than 2% of
its paid-up share capital
(vi) A body corporate whose board, managing director or
manager is accustomed to act in accordance with the
advice, directions or instructions of a director or manager,
except if advice is given in the professional capacity
(vii) Any person on whose advice, directions or instructions a
director or manager is accustomed to act, except if advice
is given in the professional capacity
(viii) Any company which is:
(A) A holding, subsidiary or an associate company of
such company; or
(B) A subsidiary of a holding company to which it is also
a subsidiary;
(ix) Such other person as may be prescribed
1his Lerm is noL delned currenLly under Lhe Companies AcL.
However, noLiled AS 18 delnes Lhe Lerm "relaLed parLy" by
stating that parties are considered to be related if at any
time during the reporting period one party has the ability to
conLrol Lhe oLher parLy or exercise siqnilcanL inluence over
Lhe oLher parLy in makinq lnancial and/or operaLinq decisions."
According to AS 18, it will apply only to the following list of
relations:
(a) Enterprises that directly, or indirectly through one or
more intermediaries, control, or are controlled by, or
are under common control with, the reporting enterprise
(this includes holding companies, subsidiaries and fellow
subsidiaries)
(b) Associates and joint ventures of the reporting enterprise
and the investing party or venturer in respect of which
the reporting enterprise is an associate or a joint venture
(c) Individuals owning, directly or indirectly, an interest in
the voting power of the reporting enterprise that gives
Lhem conLrol or siqnilcanL inluence over Lhe enLerprise,
and relatives of any such individual
(d) KMP and relatives of such personnel, and
(e) Enterprises over which any person described in (c) or
(d) is able Lo exercise siqnilcanL inluence. 1his includes
enterprises owned by directors or major shareholders
of the reporting enterprise and enterprises that have
a member of key management in common with the
reporting enterprise.
Key impact
From Lhe above, iL is clear LhaL delniLion ol Lhe Lerm "relaLed
party under AS 18 and the Companies Bill is different.
However, the likely impact that these differences will have
may vary on caseLocase basis. For example, "a lrm, in
which a director, manager or his relative is a partner and a
private company in which a director or manager is a member
or direcLor" will be idenLiled as relaLed parLies under Lhe
Companies Bill but perhaps not under AS 18.
1he Companies Bill delnes Lhe Lerm relaLed parLy Lo conLrol/
regulate related party transactions and investor protection.
AS 18 delniLion is relevanL lrom disclosure in Lhe lnancial
sLaLemenLs perspecLive. 1he MCA may clarily LhaL delniLions in
Lhe Bill are relevanL lor leqal/requlaLory purposes. For lnancial
sLaLemenL purposes, delniLion as per Lhe noLiled AS should be
used. We believe LhaL aliqninq Lhe delniLions in Lhe near Lerm
will be a useful exercise to consider by the MCA.
Related party
transactions
Like the existing Companies Act, the Companies Bill states that
a company will not enter into certain transactions unless its
board has given its consent for entering into such transactions.
However, there are many differences between the requirements
of the existing Act and the Bill. Given below is an overview of key
changes:
1. The Companies Act states that a company with a paid-up
share capital of not less than `1 crore will not enter into
speciled conLracLs, excepL wiLh Lhe previous approval ol Lhe
Central Government. The Companies Bill does not require
any government approval. Rather, it states that in the
following cases, a related-party transaction can be entered
into only if it is approved by a special resolution at the
general meeting:
(i) The company has paid-up share capital, which is not
less than the prescribed amount, or
(ii) Transactions not exceeding the amount, as may be
prescribed
No member of the company who is a related party can vote
on such special resolution.
2. Under the Companies Bill, the Central Government may
prescribe additional conditions for entering into related
party transactions.
3. Under the Companies Act, restrictions apply only to
LransacLions wiLh speciled persons/ parLies, namely, a
direcLor ol Lhe company or his relaLive, a lrm in which such
a director or relative is a partner, any other partner in such a
lrm, or a privaLe company ol which Lhe direcLor is a member
or director. In contrast, the Companies Bill will cover all
persons covered in Lhe delniLion ol Lhe Lerm "relaLed parLy".
4. Under the existing Companies Act, restrictions apply only to
the following two transactions:
(a) Sale, purchase or supply of any goods, material or
services
(b) Underwriting the subscription of any shares in, or
debentures of, the company
In addition, the Companies Bill will also cover the following
related party transactions:
(a) Selling or otherwise disposing off or buying property
(b) Leasing of property
(c) Appointment of agent for purchase or sale of goods,
material, services or property
(d) Related partys appointment in the company, its
subsidiary companies and associate companies
Restriction on
non-cash transactions
involving directors
(e) Underwriting the subscription of derivative on
securities of the company.
5. Under the Companies Bill, the above restrictions will not
apply to any transactions entered into by the company in
its ordinary course of business other than transactions,
which are not on an arms length basis. Similar exemption
is there in the Companies Act also.
6. The Companies Bill requires that every contract or
arrangements entered into with a related party will be
referred to in the boards report to shareholders, along
wiLh |usLilcaLion lor enLerinq inLo such LransacLions. 1his
disclosure is currently not required.
Key impact
1. There will not be requirement to obtain an approval
from the Central Government for entering into related
party transactions. Rather, companies will need to pass
special resolution at the general meeting, if relevant
criteria are met. Interested members will not be entitled
to vote on such resolution. Whilst this provision is likely
to ensure closer scrutiny by shareholders of related party
transactions, the minority group of shareholders could still
be a silent spectator.
2. Even if a company has entered into related party
transaction at arms length, it appears that the same
will need to be referred to in the boards report, along
wiLh |usLilcaLion lor enLerinq inLo Lhe LransacLion. 1he
disclosure requirement is also likely to cover non-cash
transactions involving directors (covered elsewhere), if
they are entered into with a related party.
Potential issue
The Companies Bill states that a company will not enter into
certain transactions unless its board has given its consent for
entering into such transactions. In certain cases, an approval
by special resolution at general meeting will be required. In this
context, the proviso states as below:
Provided that no contract or arrangement, in the case of
a company having a paid-up share capital of not less than
such amount, or transactions not exceeding such sums,
as may be prescribed, shall be entered into except with the
prior approval of the company by a special resolution.
Ideally, an approval by special resolution should be required
for transactions where amount involved is not less than the
prescribed amount. There seems to be a drafting error in this
clause. The MCA may take care of the same while prescribing
lnal rules.
1. The Companies Bill contains a new requirement to the
effect that without prior approval of the company in
a general meeting, a company will not enter into an
arrangement by which:
(a) A director of the company or its holding, subsidiary
or associate company or a person connected with
him acquires or is to acquire assets for consideration
other than cash, from the company, or
(b) The company acquires or is to acquire assets for
consideration other than cash, from such director or
person so connected,
2. If the director or connected person is a director of the
holding company, an approval will also be required by
passing a resolution in the general meeting of the holding
company.
3. Any arrangement entered into by a company or its
holding company without getting requisite approval will be
voidable at the instance of the company unless:
(a) The restitution of any money or other consideration
which is the subject matter of the arrangement
is no longer possible and the company has been
indemniled by any oLher person lor any loss or
damage caused to it, or
(b) Any riqhLs are acquired bona lde lor value and
without notice of the contravention of the provisions
of this section by any other person.
Potential issue
The Bill does not explain who will be treated as person
connected with director.
Loans to directors
and subsidiaries
Loans and investments
by company
Like the existing Companies Act, the Companies Bill contains
restrictions on advancing any loan, including any loan
represented by a book debt, to any director or to any other
person in whom the director is interested or give any guarantee
or provide any security in connection with any loan taken by
him or such other person. Given below is an overview of key
differences:
1. Under the existing Companies Act, prohibited loans/
guarantees can be made with the approval of the Central
Government. Under the Bill this possibility does not exist.
2. Unlike the existing Act, the Companies Bill does not contain
any specilc exempLion/ exclusion wiLh reqard Lo loan
given by a private company or by a holding company to
its subsidiary or for guarantee given or security provided
by a holding company in respect of any loan made to its
subsidiary company.
3. Under the Companies Bill, restrictions on making loan/
giving guarantee/ providing security will not apply to
the following.
(a) Making of a loan to the managing/ whole-time
director either as part of service condition extended
by the company to all its employees, or pursuant to
any scheme approved by the members by a
special resolution.
(b) A company, which in the ordinary course of its
business provides loans or gives guarantees or
securities for the due repayment of any loan and in
respect of such loans an interest is charged at a rate
not less than the bank rate declared by the RBI.
The existing Act does not contain this exemption.
4. The Companies Bill provides for more stringent penalty
and imprisonment for contravention.
Key impact/potential issue
ln Lhe absence ol specilc exempLion/exclusion, iL appears LhaL
a holding company will not be able give loan to/guarantee/
security on behalf of its subsidiary. This is likely to create
siqnilcanL hardship lor many companies. Our experience ol
dealing with many group structures indicates that in many
cases, a subsidiary may noL be able Lo raise lnance wiLhouL Lhe
support of the holding company.
1. The Companies Bill introduces a new requirement that a
company cannot make investment through more than two
layers of investment companies. However, this requirement
will not affect:
(a) A company from acquiring another company
incorporated outside India if such other company has
investment subsidiaries beyond two layers according to
the law of that country
(b) Subsidiary company from having any investment
subsidiary for the purpose of meeting the requirement
of any law for the time being in force.
In accordance with the Bill, Investment Company means
a company whose principal business is the acquisition of
shares, debentures or other securities.
prohibits a company from giving loan to, giving guarantee
or providing security in connection with a loan to any other
body corporate or acquiring securities of any other body
corporate, exceeding the higher of:
(a) 60% of its paid up share capital, free reserves and
securities premium, or
(b) 100% of its free reserves and securities premium.
Under the existing Act, the above restriction is applicable
only in connection with provision of loan to/ guarantee/
security on behalf of other body corporate. The Companies
Bill will extend this restriction to provision of loan to/
guarantee/ security on behalf of any person or entity.
3. Both the existing Act and the Bill allow companies to provide
loan/give guarantee/security exceeding the above limit if
they take prior approval by means of a special resolution
passed at the general meeting. In exceptional cases, the
existing Act allows companies to provide guarantee in
excess of the limit without taking prior approval; however,
Lhe same needs Lo be conlrmed aL Lhe qeneral meeLinq
within 12 months. This option will not be available under the
Companies Bill.
4. The Companies Bill contains new requirement that a
company will disclose Lo Lhe members in Lhe lnancial
statements the full particulars of loans given, investments
made or guarantee given or security provided and the
purpose for which the loan or guarantee or security is
proposed to be utilized by the recipient of the loan or
guarantee or security.
5. Under the Companies Act, the rate of interest on loan
cannot be lower than the prevailing bank rate, i.e., the
standard rate made public under section 49 of the Reserve
Bank of India Act, 1934. Under Companies Bill, the rate of
interest cannot be less than prevailing yield on one year,
Lhree year, lve year or Len year CovernmenL SecuriLy
closest to the tenor of the loan.
6. The existing Companies Act exempts the following
from these requirements. These exemptions have been
dispensed with under the Companies Bill:
(a) A private company, unless it is a subsidiary of public
company
(b) Loan made by a holding company to its wholly owned
subsidiary
(c) Guarantee given or any security provided by a
holding company in respect of loan made to its wholly
owned subsidiary
(d) Acquisition by a holding company, by way of
subscription, purchases or otherwise, the securities
of its wholly owned subsidiary
Key impact
1. Prohibition on having more than two layers of investment
companies may require many groups to reconsider
their investment structures. However, it seems that the
same restriction/ prohibition may not apply on making
investment through other than investment companies.
2. Removal of exemption for loans made/guarantee/security
given by holding company to/on behalf of its wholly
owned subsidiary will create hardship for many subsidiary
companies, which are siqnilcanLly dependenL on Lheir
parenL lor lnancinq.
3. Loan given to/guarantee given/security provided on
behalf of any person or entity will also be included in the
maximum limit.
4. A company will make disclosure regarding full particulars
of loan given, investment made or guarantee given along
with purpose for which such amount is to be utilized by the
recipienL ol Lhe loan/quaranLee/securiLy in Lhe lnancial
statements. Hence, the same will also be subjected to
audit.
Potential issue
No specilc LransiLional provisions have been prescribed lor
new/additional requirements such as restrictions on loans
made/guarantee/security given by holding company to/on
behalf of its wholly owned subsidiary and prohibition on having
more than two layers of investment companies. It is also not
clear whether change regarding interest will apply only to new
loans or it will apply to existing loans also.
Whilst there are no transitional provisions, it appears that the
prohibition applies to future loans/guarantees, and not to ones
that existed at the date of enactment. However, the prohibition
may apply when major terms and conditions of existing loans
are revised, for example, the tenure of the loan. However,
prohibition on having more than two layers of investment
companies appears to be a continuing requirement. Hence, one
may argue that the same needs to be complied with for existing
investments as well.
requires interested director to disclose his interest in a
contract/arrangement at the board meeting at which such
contract/arrangement is being discussed. It also prohibits
interested director from participating in such meetings. In
addition, the Companies Bill requires a director to disclose
his interest in a contract/arrangement entered/proposed
to be entered into with:
(a) A body corporate in which such director or such
director in association with any other director, holds
more than 2% shareholding of that body corporate,
or is a promoLer, manaqer, Chiel LxecuLive Ollcer ol
that body corporate, or
(b) A lrm or oLher enLiLy in which, such direcLor is a
partner, owner or member.
2. 1he Companies Bill requires LhaL every direcLor, aL Lhe lrsL
meeting of the board in which he participates as a director
and LherealLer aL Lhe lrsL meeLinq ol Lhe board in each
lnancial year or whenever Lhere is a chanqe in Lhe earlier
disclosure, will disclose his interest in companies, bodies
corporaLe, lrms or oLher associaLion ol individuals. Similar
requirement with regard to general disclosure of interest in
companies, bodies corporaLe, lrms or oLher associaLion ol
individuals also exists in the Companies Act.
3. Any contract/arrangement entered into by the company in
contravention of the above requirements will be voidable
at the option of the company.
4. The Companies Bill provides for stricter penalty and
imprisonment for contravention.

Disclosure of interest
by directors
1. As under the existing Companies Act, the company will
lle a scheme wiLh 1ribunal lor approval lor (i) reducLion in
share capital, (ii) making compromise/arrangement with
creditors and members and (iii) merger/amalgamation
of companies.
2. The Companies Act does not permit outbound cross-
border, i.e., merger of an Indian company with a foreign
company. The Companies Bill will allow, subject to RBI
approval, both inbound and outbound cross-border
mergers and amalgamations between Indian and
foreign companies.
3. 1he Companies AcL does noL conLain any specilc provision
regarding high court approval of a CDR scheme. However,
the Companies Bill states that an application can be made
to the tribunal for making compromise or arrangement
involving CDR. Any such scheme should, among other
matters, include:
(a) A report by the auditors of the company to the effect
that its fund requirements after the CDR will conform
to liquidity test based on the estimates provided by
the board of directors.
Mergers,
amalgamation and
reconstruction
Mergers,
amaIamaticn and
reconstruction
(b) A valuation report in respect of the shares and the
property and all assets, tangible and intangible,
movable and immovable, of the company by a
registered valuer.
4. CurrenLly, SLBl requires all lisLed companies, while llinq
any draft scheme with the stock exchange for approval, to
lle an audiLors' cerLilcaLe Lo Lhe ellecL LhaL Lhe accounLinq
conLained in Lhe scheme is in compliance wiLh noLiled
AS. There is no such requirement for unlisted companies,
including subsidiaries of listed companies. However,
currently MCA requires all RDs to ensure that accounting
treatment clause in the scheme is in compliance with
noLiled AS.
Under the Companies Bill, the tribunal will not sanction a
scheme of capital reduction, merger, acquisition or other
arrangement unless the accounting treatment prescribed
in Lhe scheme is in compliance wiLh noLiled AS and a
cerLilcaLe Lo LhaL allecL by Lhe company's audiLor has been
lled wiLh Lhe 1ribunal.
5. The Companies Act does not prohibit companies
from creating treasury shares under the scheme. The
Companies Bill will prohibit such practices. It requires that
a transferee company will not hold any shares in its own
name or in the name of trust either on its behalf or on
behalf of its subsidiary/ associate companies. It will require
such shares to be cancelled or extinguished.
6. In case of merger/ amalgamation of companies, the
following documents also need to be circulated for meeting
proposed between the company and concerned persons:
(a) Report of the expert on valuation, if any
(b) Supplementary accounting statement if the last
annual lnancial sLaLemenLs ol any ol Lhe merqinq
company relaLe Lo a lnancial year endinq more Lhan
six monLhs belore Lhe lrsL meeLinq ol Lhe company
summoned for approving the scheme.
7. 1he Companies Bill clariles LhaL Lhe merqer ol a lisLed
company into an unlisted company will not automatically
result in the listing of the transferee company. There is no
such requirement under the Companies Act.
8. 1he Companies Bill will inLroduce a simpliled procedure lor
merger and amalgamation between (i) holding company
and its wholly owned subsidiary, or (ii) two or more small
companies. Any such merger can be given effect to
without the approval of the tribunal, subject to compliance
with certain other procedures.
9. Under the existing Companies Act, any shareholder,
creditor or other interested person can raise objection to a
scheme placed before the court if such persons interests
are adversely affected. However, under the Companies Bill,
only persons holding not less than 10% of the shareholding
or having outstanding debt not less than 5% of the total
outstanding debt can raise objections to the scheme.
10. The Companies Bill also states that if, in a scheme of
amalgamation/ merger, shareholders of the transferor
company decide to opt out of the transferee company,
provision will be made for payment of the value of shares
held by Lhem and oLher benelLs in accordance wiLh a pre
determined price formula or after a valuation is made. The
amount of payment or valuation under this clause for any
share will noL be less Lhan whaL has been speciled under
any regulation framed by the SEBI.
Key impact
1. Compliance wiLh noLiled AS will be mandaLory lor all
companies, including unlisted companies. Currently,
cerLain schemes lled by unlisLed companies (includinq
those that are subsidiaries of listed companies) contain
accounting treatment, which is not in compliance with
noLiled AS.
2. Currently, certain companies holding treasury shares
recognize dividend income and gain/ loss arising on sale
ol Lreasury shares in Lhe sLaLemenL ol prolL and loss. ln
addition, holding of treasury shares through trust makes
lree loaL available Lo raise lnance in luLure, wiLhouL qoinq
through a lengthy process of issuing additional shares. The
Companies Bill prohibits the non cancellation of treasury
shares and hence, the practices referred to above will not
be possible.
Potential issues
1. It is not absolutely clear whether the requirement
reqardinq compliance wiLh noLiled AS will also apply
Lo scheme lled and pendinq lor approval aL Lhe daLe ol
enactment of the Companies Bill. We believe that the
requiremenL Lo comply wiLh noLiled AS will also apply
to all pending schemes at the date of enactment of the
Companies Bill.
2. Currently, AS 14 recognizes accounting according
to the schemes approved by the court and requires
cerLain addiLional disclosures Lo be made in Lhe lnancial
statements. In the context of listed companies, SEBI
has clariled LhaL mere disclosure accordinq Lo AS 1^
will noL be deemed as compliance wiLh noLiled AS. 1o
avoid any confusion, the MCA should also provide similar
clarilcaLion.
3. Under the current Indian GAAP, no authoritative guidance
is available on certain matters such as accounting for
demergers or spin-offs. Based on an analogy taken from
other pronouncements, various accounting alternatives
seem possible. The ICAI needs to provide appropriate
guidance on these matters.
4. In previous court schemes, courts had allowed departures
from accounting standards not only at the appointed date,
but also going forward. For example, the court would have
permitted, writing off of foreign exchange losses directly
against reserves rather than through the P&L account. Our
view is that the Companies Bill will not have any impact on
accounting prescribed in the earlier court schemes, and
will apply to all court schemes that are approved after the
Bill is enacted.
5. In case of CDR schemes, companies are required to submit
a report by the auditors to the effect that the companys
fund requirements after the CDR will conform to liquidity
test. This will require auditors to understand and comment
upon estimates made by the management for its future
business plans. This will require auditors to understand
the industry and the companys business in detail. Also,
the ICAI may need to provide appropriate guidance on the
subject.
6. In case of CDR schemes, it is mandatory for the company
to submit valuation report. Also, the company may need to
circulate valuation report, if any, in case of amalgamation
schemes. Currently, no valuation standards exist in India.
1his may resulL in siqnilcanL variances beLween Lhe
valuations performed by different valuers. To address this
aspect and streamline valuation process, ICAI should issue
standards corresponding to IFRS 13..
7. The Companies Bill prohibits creation of treasury shares in
merger/amalgamation/reconstruction schemes. Since the
Bill is silent on treasury shares already held by companies,
it is believed that this restriction will not impact treasury
shares previously held by companies.
1 Crore 10 Million
10 Lakh 1 Million
Abridged Financial Statement AFS
AS 14 Accounting for Amalgamations AS 14
Accounting Standards AS
AccounLinq SLandards noLiled under Lhe Companies (AccounLinq SLandards) Rules 2006 (as amended) noLiled AS or AS
Annual General Meeting AGM
AS 3 Cash Flow Statements AS 3
AS 6 Depreciation Accounting AS 6
AS10 Accounting for Fixed Assets AS 10
AS 15 Lmployee BenelLs AS 15
AS 18 Related Party Disclosures AS 18
AS 21 Consolidated Financial Statements AS 21
AS 23 Accounting for Investments in Associates in Consolidated Financial Statements AS 23
AS 26 Intangible Assets AS 26
AS 27 Financial Reporting of Interests in Joint Ventures AS 27
IFRS Interpretation Committee IFRIC
As 29 Provisions, Contingent Liabilities and Contingent Assets AS 29
Build Own Operate Transfer BOOT
Built Operate Transfer BOT
The Chartered Accountants Act, 1949 CA Act
Central Board of Direct Taxes CBDT
Companies (Auditors Report) Order, 2003 (as amended) CARO
Companies Act 1956 Companies Act or Act
Companies Bill 2013 Companies Bill or Bill
Companies which are not SMC Non-SMC
Consolidated Financial Statements CFS
Corporate Debt Restructuring CDR
Corporate Social Responsibility CSR
Extraordinary General Meeting EGM
Generally Accepted Accounting Principles GAAP
IFRS Interpretation Committee IFRIC
IAS 27 Consolidated and Separate Financial Statements IAS 27
IFRS 13 Fair Value Measurement IFRS 13
Income Tax Act, 1961 Income-tax Act
Ind-AS 16 Property, Plant and Equipment Ind-AS 16
lndian AccounLinq SLandards noLiled by MCA as lndian equivalenL ol lFRS Ind-AS
Insurance Regulatory and Development Authority IRDA
International Accounting Standards Board IASB
Institute of Chartered Accountants of India ICAI
Institute of Company Secretaries of India ICSI
Institute of Cost and Works Accountants of India ICWAI
Glossary
International Accounting Standards IAS
International Federation of Accountants IFAC
International Financial Reporting Standards IFRS
Key Managerial Personnel KMP
Limited Liability Partnership LLP
Ministry of Corporate Affairs MCA
National Advisory Committee on Accounting Standards NACAS
National Financial Reporting Authority NFRA
Nomination and Remuneration Committee NRC
Non Public Interest Entities Non-PIEs
Ollcial LiquidaLor OL
Public Interest Entities PIEs
Public Private Partnership PPP
Regional Directors RD
Registrar of Companies ROC
Reserve Bank of India RBI
SEBI (Disclosure and Investor Protection) Guidelines 2000 SEBI DIP guideline
SEBI (Issue Of Capital And Disclosure Requirements) Regulation 2009 SEBI ICDR regulation
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 SEBI Takeover Code
Securities and Exchange Board of India SEBI
Serious Fraud lnvesLiqaLion Ollce SFIO
Small and Medium Sized Company as delned under Lhe Companies (AccounLinq SLandards) Rules, 2006 SMC
Stakeholders Relationship Committee SRC
Stand-alone Financial Statements SFS
Standards on Auditing issued by ICAI SA
Statement of Change in Equity SOCIE
SLaLemenL ol ProlL and Loss / ProlL and Loss AccounL P&L account / P&L
Straight Line Method SLM
Unit of Production UOP
Unites States US
Written Down Value WDV
Glossary
Cur oIhces
Cur oIhces
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NCR
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